The rule enables donors of gifts and persons acting in a fiduciary capacity, mainly trustees, who have made dispositions beyond their authority, or failed to appreciate the consequences of their actions, to undo actions that had adverse tax consequences and treat them as if they had never been made.
The Supreme Court’s judgement means that the Hastings-Bass principle no longer extends to situations where the trustees take advice which turns out to be incorrect.
The judgement is also topical in the current environment as it also contained remarks about the court’s attitude to failed tax avoidance schemes.
In the joined cases of Futter and another v HMRC and Pitt and another v HMRC, trustees who made dispositions based on incorrect tax advice could not have those dispositions set aside simply because the tax consequences were different from what they expected. There must be a breach of the fiduciary’s duties before the rule applies. Taking professional advice which later transpires to be incorrect does not involve any such breach and does not therefore fall under this narrowed scope of the Hastings-Bass rule, meaning the transactions cannot be set aside.
Some dispositions may be voidable for mistake
Courts have a discretion to declare dispositions void on the grounds of mistake but only if they deem it equitable to do so. ‘Mistake’ is different from Hastings-Bass: the court must consider the gravity of the mistake and assess it in terms of the injustice that would be caused by it or its unconscionableness.
Mrs Pitt was the receiver under an order made by the Court of Protection for her husband following a serious accident. She set up a trust for his maintenance in the mistaken belief that the transfer into the trust would be exempt from inheritance tax. The Inheritance Tax Act 1984 allows for such ‘disabled persons’ trusts’ to be set up IHT-free but the form of trust adopted did not meet the criteria. The court’s judgment was that allowing Mrs Pitt to ‘try again’ was in keeping with the policy objective of allowing for disabled persons’ trusts.
In contrast, Mr Futter’s case involved a trust distribution made with a tax saving motive, but where incorrect advice had been given concerning the availability of losses to offset gains. The Supreme Court ruled that they had to decide “whether the Court should assist in extricating claimants from a tax-avoidance scheme which had gone wrong.” The view of the Court was that it was not unconscionable for the trustees’ distribution to be allowed to stand and the Court declined to make the distribution void. Although the tax planning was accepted as not being at the extreme of artificiality, it was declared to be ‘hardly an exercise in good citizenship’ and tax avoidance generally to be ‘a social evil’. Thus, any failed tax avoidance schemes involving trusts are hardly likely to get a sympathetic hearing from the courts under Hastings-Bass.
The case highlights the need for trustees and donors to obtain guidance from suitably competent specialist advisers.