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Futter & Anor v. Revenue and Customs

Smart Summary

Factual and Procedural Background

The judgment consolidates two appeals before the Supreme Court. In Futter v Futter the trustees of two family settlements (the “No 3” and “No 5” trusts) acted, on solicitors’ advice, to enlarge and advance trust property. The advice overlooked an amendment to section 2(4) Taxation of Chargeable Gains Act 1992, triggering unexpected capital gains tax for the beneficiaries. At first instance the deeds were declared void under the so-called “rule in Hastings-Bass,” but the Court of Appeal reversed that decision. In Pitt v Holt Mrs Pitt, acting as receiver for her catastrophically injured husband, settled his damages in a discretionary “Special Needs Trust” (“SNT”). Professional advisers and the Court of Protection failed to identify an immediate inheritance-tax charge, later exceeding £100,000. The first-instance court set the SNT aside under the Hastings-Bass rule; the Court of Appeal reversed on that point and also rejected a rescission claim based on mistake. Both sets of appellants sought further review in the Supreme Court; HM Revenue & Customs (“the Revenue”) was an active respondent.

Legal Issues Presented

  1. Whether a fiduciary decision can be set aside under the Hastings-Bass jurisdiction unless the decision involved a breach of fiduciary duty.
  2. Whether reliance on erroneous professional tax advice, without more, constitutes such a breach.
  3. Whether and when the court may rescind a voluntary disposition on the ground of mistake, particularly a mistake about tax consequences.
  4. Whether relief is barred where setting aside the transaction would serve no purpose other than removal of a tax liability.

Arguments of the Parties

Appellants’ Arguments

  • The Hastings-Bass rule should remain available even absent breach of duty; mere failure to achieve the trustees’ intended fiscal objective ought to suffice.
  • Fault by professional advisers should be attributed to the trustees so that any resulting decision is voidable.
  • In Pitt, the SNT should also be rescinded for mistake: Mrs Pitt mistakenly believed there would be no inheritance-tax liability.

Revenue’s Arguments

  • The jurisdiction arises only where trustees breach fiduciary duty; conscientious reliance on apparently competent advice is not enough.
  • Mistake relief should be narrowly confined; an error limited to tax consequences is insufficient.
  • Equity should not act where rescission would achieve nothing beyond tax avoidance.

Table of Precedents Cited

PrecedentRule or Principle Cited ForApplication by the Court
In re Hastings-Bass [1975] Ch 25Original statement of jurisdiction to intervene in trustee decisionsRe-examined; Court confines its true ratio to cases of excessive execution of powers
Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587Expanded Hastings-Bass to inadequate deliberationHeld to have taken the law down a “wrong turn”
Ogilvie v Littleboy (1897) 13 TLR 399 / Ogilvie v Allen (1899) 15 TLR 294Rescission of gifts for serious causative mistakeAdopted as the correct test for mistake jurisdiction
Gibbon v Mitchell [1990] 1 WLR 1304Distinction between mistake as to “effect” and “consequences”Court limits but does not abandon this distinction
Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409Need for breach of duty in Hastings-Bass applicationsApproved
Edge v Pensions Ombudsman [2000] Ch 602Public-law analogy rejected; breach requiredApproved
Stannard v Fisons Pension Trust Ltd [1991] Pen LR 225“Would” vs “might” testFlexibility preferred; no rigid rule
Turner v Turner [1984] Ch 100Non est factum where trustees never exercise judgmentContrasted with present cases
Cloutte v Storey [1911] 1 Ch 18Fraud on a power renders appointment voidDistinguished; fraudulent appointments set aside as void
Great Peace Shipping Ltd v Tsavliris [2003] QB 679Contractual mistake doctrineHeld not to govern voluntary dispositions
WT Ramsay Ltd v IRC [1982] AC 300Judicial hostility to artificial tax avoidanceReferenced as background policy
Deutsche Morgan Grenfell v IRC [2007] 1 AC 558Mistake of law and tax repaymentsUsed to rebut Revenue’s “tax mistakes never relieved” argument
Attorney-General v Guardian Newspapers [1987] 1 WLR 1248“Equity does not act in vain” maximRevenue relied; Court distinguished
Racal Group Services Ltd v Ashmore [1995] STC 1151Rectification where only fiscal benefit soughtCourt held rescission test less restrictive
In re Pilkington’s Will Trusts [1964] AC 612Perpetuities in resettlementsHistorical background
In re Abrahams’ Will Trusts [1969] 1 Ch 463Advancement exceeding power scopeIllustrates excessive execution
In re Vestey’s Settlement [1951] Ch 209Tax-driven income allocationsEarly authority pre-Hastings-Bass
Kerr v British Leyland (Staff) Trustees Ltd [2001] WTLR 1071Trustees’ failure to consider medical evidenceCited on standard of deliberation
Perrins v Bellamy [1899] 1 Ch 797Trustee liability despite professional adviceIllustrates strict liability for ultra vires acts
Director of Public Prosecutions v Hutchinson [1990] 2 AC 783Severance of ultra vires by-lawsAnalogy for partial invalidity
Scott v National Trust [1998] 2 All ER 705Trustees’ duty to inform themselvesGuides deliberation standard

Court's Reasoning and Analysis

1. The Supreme Court separated two distinct doctrines:

  • Excessive execution – where trustees act outside the scope of a power; dispositions are void.
  • Inadequate deliberation – where trustees act within power but fail in duty; dispositions are voidable, and may be set aside only if the failure amounts to a breach of fiduciary duty.

2. Applying that distinction, the Court endorsed Lightman J’s view in Barr: breach of duty is an essential pre-condition. Mere reliance on competent professional advice, later shown to be wrong, does not amount to breach.

3. On that basis, the deeds in Futter could not be impugned: the trustees considered tax, obtained advice, and acted within their powers—hence no breach.

4. In Pitt, Mrs Pitt, likewise, obtained and relied on professional advice; therefore the Hastings-Bass claim also failed.

5. Turning to mistake, the Court reformulated the test: a disposition may be rescinded where there is a causative mistake of sufficient gravity, typically a mistake as to the transaction’s legal nature or a basic fact/law, making it unconscionable to leave the disposition uncorrected. The traditional “effect versus consequences” dichotomy from Gibbon v Mitchell was narrowed; serious tax mistakes can qualify.

6. The Court rejected the Revenue’s contention that tax mistakes are never releasable and that equity “acts in vain” where only fiscal relief is achieved. Section 150 Inheritance Tax Act 1984 expressly contemplates undoing transactions set aside “by enactment or rule of law.”

7. Applying the reformulated test, Mrs Pitt’s SNT was created under an operative mistake—her firm belief that no inheritance-tax charge would arise. The mistake was basic and its fiscal impact severe; rescission was therefore granted. Undertakings provided by Mrs Pitt ensured no collateral claims against third parties, satisfying equitable discretion.

Holding and Implications

FUTTER APPEAL DISMISSED. The deeds of enlargement and advancement remain effective; capital gains tax liabilities stand.

PITT APPEAL ALLOWED. The Special Needs Trust is rescinded ab initio; inheritance tax becomes repayable under section 150 IHTA 1984.

Implications: The decision confines the Hastings-Bass jurisdiction to cases involving breach of fiduciary duty, re-establishes that affected acts are voidable (not void), and clarifies that serious operative mistakes—including tax mistakes—can justify rescission of voluntary dispositions. Trustees must now assess decisions with diligence; beneficiaries must rely on mistake or professional-negligence claims where no breach of duty exists. No new statutory reform was required, but the ruling materially narrows previous first-instance expansions of Hastings-Bass and signals judicial reluctance to unwind transactions merely to avoid unforeseen tax.

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Futter & Anor v Revenue and Customs

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Futter & Anor v Revenue and Customs
(May 9, 2013)