Allnutt & Anor v Wilding & Ors

Rectification of a voluntary settlement is available only to correct a document which, through a mistake in its drafting, wording or meaning, fails to record the settlor’s actual intentions when it was executed. It does not permit the court to substitute a different settlement merely because the executed settlement failed to achieve an intended fiscal advantage.

A settlor’s mistaken belief that a later payment into a correctly recorded discretionary settlement would be a potentially exempt transfer is a mistake as to the payment’s fiscal consequences. It is not a mistake in the settlement’s recording of the settlor’s intentions. Clear evidence is also required of the specific alternative terms which the settlor intended.

The trustees sought rectification of a 1995 settlement made for the benefit of the settlor’s three children. The settlement created discretionary trusts. After the settlor’s death, it emerged that a payment of £550,000 into the settlement had not been a potentially exempt transfer for inheritance-tax purposes.

The trustees contended that the settlement should be rectified retrospectively into an interest in possession settlement. They said that this would reflect the settlor’s intention to obtain the intended tax saving. Rimer J dismissed the unopposed claim. The trustees appealed, contending that the settlor’s mistake concerned the legal effect of the settlement and that the evidence established an intention to use a different form of trust.

1. Appeal dismissed unanimously. Mummery LJ held that rectification is concerned with correcting the record of the transaction. In a voluntary settlement, the court may bring the instrument into line with the settlor’s true intentions at execution where a drafting mistake, an omission, an unintended inclusion, or a mistaken understanding of the words used has caused the instrument to misrecord those intentions.

2. The settlement accurately recorded the settlor’s intention to confer benefits on his children through a discretionary trust. His and his advisers’ mistake was that a later payment into that settlement would be a potentially exempt transfer and would reduce inheritance tax if he survived for the requisite period. That was a mistake as to the potential fiscal effect of the payment, not an error in the settlement’s language, meaning, legal effect, or recording of intention.

3. Rectification could not be used to replace the discretionary settlement with a wholly different interest in possession settlement solely to obtain the tax advantage which the original arrangement failed to secure. The court expressed no view on whether the settlement might have been set aside for mistake, since that remedy would not achieve the relief sought.

4. The uncontradicted written evidence did not establish any specific intention to execute a settlement in different terms. A general intention to mitigate inheritance tax while benefiting children through a settlement was insufficient. Carnwath LJ added that the evidence did not prove that the proposed alternative draft contained the trust powers and provisions the settlor intended. Hooper LJ agreed with both judgments.

• Court of Appeal (Civil Division): Appeal dismissed: [2007] EWCA Civ 412.
• High Court, Chancery Division (Rimer J): On 26 July 2006, dismissed the trustees’ claim to rectify the settlement.