Jersey’s decision: mistake or conscious risk-taking? – Inheritance tax
Representation of A re the E Settlement  CCR 52
Royal Court of Jersey, 28 February 2022
Sir William Bailhache, Commissioner, Jurats Ramsden and Cornish
In a recent decision, the Royal Court expressed its reluctance to grant relief for error in circumstances where, rather than a grantor being ignorant and therefore misleading about the risks of a transaction, the grantor took risks as advised but misjudged the extent of those risks.
The settlor was born and raised in the United Kingdom and had an English heritage domicile. He left the UK in 1959, living in Papua New Guinea and Australia until 1993 when he returned to the UK. In 1996 the settlor applied and in 1998 received confirmation from HMRC that they did not consider him to be domiciled in the UK at the time. He continued to reside in the UK thereafter.
The settlor consulted a professional circa 2007 following proposed changes to the tax regime for non-domiciles in the UK. At this time, two land deals in the UK were proposed involving a company owned by the settlor. The settlor was advised to liquidate the shares of the company in trust before April 5, 2008, on the grounds that the trust structure would confer significant tax advantages. A declaration of trust was made on April 2, 2008. The shares were settled in trust and the land transactions continued. It does not appear from the judgment that a detailed opinion was given as to the grantor’s domicile at the relevant time, although counsel for the grantor expressed the view that “HMRC accepted [the Settlor] was undomiciled in the late 1990s, from memory. I think it would be almost impossible for them to go back on this“.
In April 2021, following inquiries into the domicile by HMRC and an enquiry, HMRC notified the settlor of its finding that it had retained its original domicile at all times, or alternatively that its original domicile had been reinstated before 2008. If HMRC’s analysis was correct, this could have resulted in “potentially catastrophic” settlor’s tax liabilities. The settlor therefore applied to the Royal Court under Section 11 and/or Section 47E of the Trusts (Jersey) Act 1984 to set aside the Declaration of Trust for error on the grounds that he failed to acknowledge that HMRC might be able to reopen the matter of his home.
The Court, applying its “well-established” approach, examined the facts of the case in relation to the following three questions:
- Was there an error on the part of the settlor regarding the establishment of the trust or the transfers of assets in trust?
- Wouldn’t the trust or trust transfers have been made but for the error?
- Was the error of a serious enough character to make it fair for the Court to make a finding?
The royal court”with some hesitationultimately concluded that all three of these criteria were met in this case such that it was appropriate to exercise its discretion to grant the relief sought.
The Court’s comments are particularly interesting, as they reflect a developing line of distinction between a settlor who takes calculated (but, in hindsight, misjudged) risks in entering into tax arrangements, versus a settlor who does not is genuinely unaware of (and therefore misunderstands) the risks he takes. The Court reiterated the concerns it had expressed in previous cases regarding granting relief to settlors in the old situation, finding that:
“In the first case, there should be no sympathy for such a constituent. He played and lost. In the latter case, the Court, as demonstrated by the authorities, looks more sympathetically at such a settlor because although his motivation – to save tax – remains the same, he bears no personal guilt, although his professional advisers probably are. The approach your Court has taken many times in the past has been to exempt the settlor in the latter case from having to engage in risky proceedings alleging negligence of professional advisers, with all the difficulties that may arise either with prescription, liability, or removal of damages.“
The Court was particularly skeptical of the suggestion that the Settlor, clearly a successful businessman aware of the importance of his home to his tax affairs, might consider that the confirmation from HMRC in 1998 would continue to be valid and would not could not be reviewed in 2008 when his situation had changed significantly. However, the Court ultimately hesitantly accepted that the settlor had not been told, and therefore mistaken, of the possibility that HMRC would claim that his chosen home might have been lost, and awarded relief.
PREVIOUS CASES INVOLVING AN ERRONEOUS RISK ASSESSMENT
This decision follows previous cases where the Court has overturned transfers to a trust due to an error in the domicile of the settlor.
In Q v Lutea Trustees Limited and others  JRC 166, the settlor’s reliance on advice from tax advisers as to his domicile was recognized as an error, although the settlor assessed following this advice that there was a remote risk that he could be considered as having returned to his English home. The Court accepted that the Settlor was unaware of any risk that HMRC would consider he had retained his original domicile, which was sufficient to establish error. However, the Court also considered that the settlor’s belief (formed on a reasonable basis of the advice he had received) as to the extent of the risk that he would be considered to have returned to his UK domicile was so remote from a realistic assessment of this risk that it can be described as erroneous. It is clear from the judgment that the extent of the advice taken by the settlor in that case was considerably more extensive than that taken in the present case.
The potential relevance of conscious risk-taking emerged in an earlier case, where the Court denied relief: In the case of the settlement of the interests of life B  JRC 229, our summary of which can be found here. In that case, the transaction had been entered into by the trustee to mitigate UK inheritance tax and had been made on the basis of thorough professional advice, but would only be effective in mitigating the IHT if the settlor survived for a period 7 years from the date of the appointment. The settlor (aged 57 at the time) was diagnosed with an aggressive form of Alzheimer’s disease shortly after the appointments were made and died before the 7-year deadline expired, giving rise to a heavy tax burden if the operation could not be settled. The trustee sought relief on the grounds that he had mistakenly believed that the settlor was a healthy 57-year-old man whose life expectancy would exceed 7 years. The Court ultimately found that the parties had been aware of concerns about the settlor’s mental function, even though his condition had not been formally diagnosed. The Court was particularly disturbed by the fact that the life insurance had not been taken out although this possibility had been considered. The parties were found to have consciously taken the risk as to the grantor’s life expectancy at the time the transactions were entered into. However, unlike the domicile cases above, the Court treated risk-taking as relevant in determining whether it was grossly unfair not to disrupt transactions, rather than in determining whether there had been any error at all. .
These cases taken together show that it will be a question of fact and degree whether the misjudgment of the degree of risk knowingly taken is so serious that it amounts to an error and/or justifies the Court suspending the remedy. The judgment the Court must make in such cases boils down to thin margins, making it more difficult to carefully examine the evidence as to the precise extent of awareness of essential risk and to predict the outcome. .
The Court also reiterated its previous expressions of distaste at the idea of coming to the aid of settlors who made arrangements to save large amounts of tax, only to find later that those arrangements did not have as much more successful than expected. It should be noted, however, that the remedy has not been refused on this ground, to date.
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