Futter v HMRC and Pitt v HMRC (Supreme Court) – 9 May 2013

The Supreme Court handed down its judgment in the joined cases of Futter v Futter and Pitt v Holt on 9 May 2013. These cases are important for the development of trusts law, including pensions.

Background

The facts of both cases involved the unintended tax consequences of trustee decisions.

Mr Futter had two offshore trusts which contained “stockpiled gains” for Capital Gains Tax purposes. By making various distributions to beneficiaries to deal with this, the trustees inadvertently triggered a tax charge. Following her husband’s road accident (in which he sustained serious head injuries), Mrs Pitt was appointed as her husband’s receiver under Mental Health legislation. She placed his accident compensation into a settlement which led to inheritance tax consequences.

When the High Court found in favour of both of the above parties based on the principle in Hastings-Bass, perhaps unsurprisingly, HMRC appealed. Given the similarity between them, the two cases were heard under a single appeal.

Rule in Hastings Bass

Many of the cases involving the so-called rule or principle in Hastings-Basshave involved private trusts, where the trustees received incorrect advice on the tax consequences of the exercise a particular discretion. But its use is not confined to cases involving tax as the principle has been applied more widely in the occupational pensions arena to cover other unintended consequences of trustee decisions. Until recently, the leading case on the principle was Sieff and others v Fox.  In that case, Lord Justice Lloyd (sitting as a High Court judge) described the principle as allowing the court to set aside the exercise of a trustee discretion where its effect was different from that intended, and the trustees would not have acted as they did had they not failed to take account of something relevant or taken into account something irrelevant.

But the Supreme Court in Futter v Futter and Pitt v Holt has approved the 2011 decision of the Court of Appeal in relation to the rule in Hastings-Bass. This means that the line of cases following Warner J’s interpretation of the rule in Mettoy Pension Trustees Ltd v Evans, including Sieff v Fox, have been held to be incorrectly decided. In future, a decision made by trustees acting within the scope of their powers is voidable only if the trustees have acted in breach of trust, and that trustees are not in breach of trust if they act on appropriate professional advice.

Mistake

However, the Court allowed the appeal in Pitt v Holt on the ground of mistake. The Court held that the true test in order to put aside a decisions on the ground of mistake is simply for there to be a causative mistake of sufficient gravity. The test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction. The court held that mistake must be distinguished from mere ignorance, inadvertence, and misprediction. Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake. Mere ignorance of the law, even if causative, is insufficient.