Hartogs v Sequent (Schweiz) AG & Ors

Factual and Procedural Background

The Plaintiff brought a claim by way of a Part 8 claim form dated 4 December 2018 seeking to set aside two voluntary transactions made in 2009 and late 2013/early 2014. The case concerns two trusts of which the Plaintiff is the settlor and one of the beneficiaries. The first Defendant, Company A, is the trustee of both trusts. One trust, the Milky Way Settlement Trust, owns the second Defendant, Company B, a British Virgin Islands (BVI) incorporated trading company. The other trust, the Mercurius Settlement Trust, owns the third Defendant, Company C, also a BVI incorporated trading company.

The 2009 transaction involved the Plaintiff settling funds into the Milky Way Settlement Trust, which acquired Company B, which in turn acquired a UK residential property for the Plaintiff's family’s occupation. The purchase price was approximately £4.195 million, with an additional £2.9 million transferred for renovation costs.

The late 2013/early 2014 transaction involved the Plaintiff establishing the Mercurius Settlement Trust, which acquired Company C. The Plaintiff transferred four classic cars and funds for purchasing five additional cars, along with restoration costs, into this trust structure.

The Plaintiff claims that he acted under an operative mistake regarding the tax consequences of these transactions, wrongly assuming there would be no immediate inheritance tax liabilities. He seeks to set aside the transactions on the grounds of mistake.

The first Defendant filed an acknowledgment of service but did not contest the proceedings and indicated it would seek to represent the beneficiaries. The court recognized this was unnecessary due to the provisions of CPR 19.7A. HM Revenue & Customs (HMRC) were invited to join but declined, and no representations were made by HMRC.

The Plaintiff is represented by Attorney Wilson QC, and the Defendants by Attorney Weale (of counsel). The evidential record includes witness statements from the Plaintiff and from Ms. Steward, a director and solicitor associated with the first Defendant and related entities.

Legal Issues Presented

1. Whether the Plaintiff made a relevant and sufficiently serious mistake as to the tax consequences of the two transactions to warrant setting aside the voluntary dispositions under the principles established in Pitt v Holt.
2. Whether English law applies to the case despite the trusts being governed by Guernsey law and the holding companies incorporated in the BVI.
3. The application of the three-stage test from Pitt v Holt for rescission: (1) presence of a mistake; (2) relevance of the mistake; and (3) seriousness of the mistake to satisfy the Ogilvie v Littleboy test.
4. The exercise of the court’s discretion to grant relief by setting aside the transactions on grounds of mistake.

Arguments of the Parties

Appellant's Arguments

• The Plaintiff acted under a mistake of fact and law regarding the immediate inheritance tax consequences of the transactions, mistakenly believing there would be no adverse tax charges.
• The mistake was operative, causative, and sufficiently serious to engage the court’s jurisdiction under the Pitt v Holt framework.
• The Plaintiff relied on professional advice from his then advisors, which was incorrect, and only discovered the true tax implications in 2016 from current solicitors.
• The Plaintiff did not run the risk of being wrong and was not careless in a way that would bar relief.
• The Plaintiff would not have entered into the transactions had he known the true tax consequences and would have held the assets in his own name to avoid immediate tax charges.
• The Plaintiff submits that the transactions are appropriate for rescission and that the court should exercise its discretion to set them aside.

Defendant's Arguments

• The Defendants support the Plaintiff’s claim and acknowledge that it would not be in the beneficiaries’ best interests for the assets to remain locked in the trusts, where tax liabilities would erode their value.
• The first Defendant, as trustee, has canvassed the beneficiaries’ views, who support the claim given the Plaintiff’s intention to pass wealth tax-efficiently to his descendants.
• The Defendants agree that setting aside the transactions would preserve the family’s wealth from ongoing tax erosion and support the claim accordingly.
• It is anticipated that any accounting or inquiries regarding traceable proceeds can be resolved by agreement or court directions.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by confirming that English law applies as no foreign law was pleaded or proved, despite the trusts being governed by Guernsey law and companies incorporated in the BVI. The court then applied the three-stage test from Pitt v Holt:

1. Mistake: The Plaintiff’s belief that there would be no immediate inheritance tax charges was a conscious, operative mistake rather than mere ignorance or inadvertence. This was supported by evidence of reliance on professional advice and consistent with authorities recognizing tacit assumptions as mistakes.
2. Relevant type of mistake: The mistake concerned a fundamental misunderstanding of the legal and tax consequences of the transactions, meeting the requirement that the mistake be basic to the transaction.
3. Seriousness of mistake: The mistake was sufficiently grave to render it unconscionable for the dispositions to remain. The Plaintiff faced substantial immediate tax liabilities (approximately £1.7 million for the 2009 transaction and £1.2 million for the 2014 transaction) and ongoing tax charges, which he would not have incurred had he known the true position.

The court also considered the Plaintiff’s knowledge of a 2010 email from accountants referencing domicile status but found that the Plaintiff did not understand the implications, and this did not negate the operative mistake. Carelessness, if any, did not bar relief.

The Defendants, as trustees, supported the claim and agreed that setting aside the transactions would prevent erosion of the trust assets through tax charges, aligning with the Plaintiff’s intention to preserve wealth for his family.

The court emphasized that the principles in Pitt v Holt are strictly applied and do not permit relief simply because a taxpayer faces an unexpected tax charge. However, in this case, all preconditions for relief were met, and the Plaintiff’s evidence was clear and unchallenged.

Consequently, the court concluded it was appropriate to exercise its discretion to set aside both transactions and order that the assets or their traceable proceeds be returned to the Plaintiff. The court allowed for accounts and inquiries if the parties could not agree on the traceable proceeds.

Holding and Implications

The court’s final decision is to set aside both the 2009 and the late 2013/early 2014 transactions executed by the Plaintiff on the grounds of operative mistake under English law principles established in Pitt v Holt.

The effect of this decision is that the assets and/or their traceable proceeds held in the trusts will be returned to the Plaintiff, thereby relieving him of the significant immediate and ongoing inheritance tax liabilities that arose due to the mistake. The court’s order includes provision for accounting and inquiries if necessary.

No order as to costs was made.

The judgment does not establish new legal precedent but applies established equitable principles to the facts, illustrating the strict but available jurisdiction to set aside voluntary dispositions made under serious mistake, particularly in tax planning contexts.