Freedman v Freedman & Ors

A voluntary settlement may be rescinded for equitable mistake where the settlor made a distinct and causative mistake of sufficient gravity, assessed by examining the transaction and its consequences as a whole. A mistake about tax consequences may qualify. The court must evaluate objectively whether it would be unconscionable to leave the disposition uncorrected, with intense focus on the particular facts. The fact that the mistake resulted from carelessness does not automatically prevent relief, unless the settlor deliberately or effectively accepted the risk of being wrong. Relief may be refused in an artificial tax-avoidance scheme, but the mere presence of tax consequences does not create an exclusion.

Melanie Freedman applied under Part 8 to set aside the Melanie Freedman Settlor Interested Settlement, dated 4 February 2013, on the ground of equitable mistake. The settlement comprised two properties and was intended principally to protect Melanie and her son from perceived personal and financial risks, while preserving an arrangement under which a loan from her father would be repaid.

Her solicitor failed to explain that the transfer into the settlement would create immediate inheritance tax, later ten-yearly and exit charges. The resulting liability affected her ability to repay the loan. The trustees did not contest the claim. The represented beneficiaries supported it, while HMRC opposed relief. The central issue was whether Melanie had made a sufficiently serious and causative mistake and whether it would be unconscionable for the beneficiaries to insist on the settlement.

1. Relief granted. The settlement was set aside on the ground of equitable mistake.
2. The governing principles were those stated by the Supreme Court in Pitt v Holt; Futter v Futter [2013] UKSC 26. There must be a distinct mistake, rather than mere ignorance, inadvertence or misprediction. The court may infer a conscious belief or tacit assumption from the evidence. Carelessness does not necessarily bar relief unless the settlor deliberately, or must be taken to have, run the risk of being wrong.
3. The mistake must be causative and sufficiently grave. The test is not confined to a mistake about the legal character or essential nature of the transaction. A mistake about tax consequences may be sufficiently serious. The gravity of the mistake is assessed by close examination of the circumstances and consequences.
4. Melanie had seen the solicitor’s incorrect advice and, since her evidence was not challenged, it was reasonable to infer that she broadly understood that entering the settlement would not create adverse tax consequences or impede repayment of the loan. This was a distinct mistake, not mere causative ignorance.
5. The tax liability was not merely an obligation to pay inheritance tax. It materially impaired the agreed repayment of the loan and therefore made the practical effect of the settlement substantially different from Melanie’s understanding. That consequence gave the mistake the required degree of gravity.
6. Whether it would be unconscionable to leave the mistake uncorrected required an objective evaluation of the whole circumstances, including the mistake, its centrality and its consequences. Speculation that the loan might later be waived or repaid from other resources could not displace the evidence. The beneficiaries were volunteers and had not changed their position. Maintaining the settlement was likely to jeopardise Melanie’s home, while setting it aside would not revive the mischief which the settlement was intended to address.
7. The court rejected the suggestion that the transaction was necessarily a fraud on HMRC. The intentions of Melanie’s father or solicitor were irrelevant to Melanie’s intention in making the settlement.