Futter & Anor v Futter & Ors

The rule in Hastings-Bass concerns the validity of a fiduciary exercise of a power, not rescission for mistake. At first instance, no distinction is drawn between the legal effect of an exercise and its fiscal consequences. Tax consequences affecting the trust fund or beneficiaries may be factors which trustees ought to consider. Relief is available where failure to consider them made a real difference and the trustees would not have acted as they did had they known the true position. The rule may apply whether the trustees were ignorant of the true position or were given incorrect advice. In private family trusts, the consequence is that the transaction is void, subject to equitable mitigation such as change of position, laches, acquiescence and severance.

The claimants were trustees of two family life-interest settlements. They exercised powers of enlargement and advancement after receiving incorrect advice that personal capital losses could be set against gains attributed to beneficiaries under the Taxation of Capital Gains Act 1992. The advice overlooked section 2(4), with the result that substantial capital gains tax liabilities arose.

The trustees sought declarations that the deeds were void and of no effect under the rule in Hastings-Bass. HMRC resisted the relief, arguing that the transactions achieved their intended legal effect, that the tax error was not sufficiently significant, and that the rule should not relieve professional advisers from the consequences of bad advice. The court also had to determine whether the deeds were void or merely voidable.

1. Relief granted. The deeds dated 31 March 2008 and 3 April 2008 were set aside. The court held that both were void.
2. The rule in Hastings-Bass derives from the law concerning the validity of exercises of fiduciary powers, rather than from the general law of mistake. The court therefore declined to harmonise the rule with rescission for mistake.
3. At first instance, the court must apply the formulation in Sieff v Fox: where trustees exercise a discretionary power and the effect is different from that intended because they failed to consider relevant matters, or considered irrelevant matters, the court may interfere if it is clear that they would not have acted as they did had they known the true position.
4. No distinction is drawn between the direct legal effect of an exercise and its fiscal consequences. Tax consequences for the trust estate or beneficiaries are, in principle, relevant considerations. The court must identify the factors which trustees ought reasonably to have considered and then ask whether the failure to consider them made a real difference.
5. The trustees’ mistake was material. The attribution of stockpiled gains to beneficiaries and the resulting impact on the trust fund were matters it was reasonable for them to consider. The evidence established that, had they understood the effect of section 2(4) of the Taxation of Capital Gains Act 1992, they would not have made the advancements. The rule may apply where trustees receive bad advice as well as where they are simply ignorant of the true position.
6. The rule is not intended to protect advisers from professional negligence. Its purpose is to prevent beneficiaries suffering from an invalid exercise of a fiduciary power. In relation to private family trusts, an invalid exercise makes the deed void. Equitable considerations may mitigate the consequences, including change of position, laches, acquiescence, severance and the discretionary nature of declaratory relief.
7. Property transferred under the deeds was held on constructive trust for the relevant trustees and had to be returned, with an account of income. The trustees were to be treated as having retained the property throughout and were responsible for tax, interest and penalties on that basis.