Allnutt v Wilding
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Carnwath,Lord Justice Hooper |
| Judgment Date | 03 April 2007 |
| Neutral Citation | [2007] EWCA Civ 412 |
| Docket Number | Case No: A3/2006/1836 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 April 2007 |
[2007] EWCA Civ 412
Lord Justice Mummery
Lord Justice Carnwath and
Lord Justice Hooper
Case No: A3/2006/1836
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE RIMER)
Royal Courts of Justice
Strand, London, WC2A 2LL
MR A HALL TAYLOR (instructed by Messrs Photiades) appeared on behalf of the Appellant.
THE RESPONDENT DID NOT APPEAR AND WAS NOT REPRESENTED.
This is an appeal with the permission given by Arden LJ on 13 November 2006. The appeal is from the order made by Rimer J on 26 July 2006. He dismissed a claim by the appellant trustees (“the trustees”) for rectification of a settlement made on 18 December 1995 (“the settlement”). I shall refer to the late Mr Malcolm Strain, who made the settlement, as “the settlor.”
It is an unusual claim. In brief it is that:
(1) the settlor intended to make a Potentially Exempt Transfer (“PET”) of funds to the trustees of the settlement which was established for the benefit of the settlor's three children.
(2) The purpose was thereby to reduce the amount of inheritance tax which would be payable on his death.
(3) As was discovered in correspondence with the Inland Revenue following the settlor's death more than seven years' later (9 February 2004), the terms of the settlement were not such as to achieve the intended result of saving tax.
(4) This was because the funds which had been transferred by the settlor to the trustees were not a PET and
(5) Inheritance tax was therefore payable in respect of the funds held by the trustees of the settlement. The trustees submitted that there was clear evidence of the settlor's true intentions and of his instructions to his solicitor. They contended that it was apparent that the settlement, as executed, was contrary to those intentions and instructions.
The aim of those instructions was to achieve a saving of inheritance tax on his death. So he paid the sum of £550,000 to the trustees of the settlement in 1995 under a mistaken belief that the transfer would be a PET for inheritance tax purposes. It was not. The reason it was not was because the settlement contained discretionary trusts for the three children rather than creating interests in possession for them. The claim for rectification is that the settlement should be rewritten so that, instead of being a discretionary trust, it is an interest in possession trust, which would take effect as from the date of the execution of the original settlement. The settlement, as rectified, would then, it is argued, reflect the settlor's true intentions and would thereby achieve the intended tax saving. The interested parties, who are the beneficiaries under the settlement, being the settlor's three children, would obviously benefit from rectification if inheritance tax were not payable on their trust fund. Naturally, they consent to the relief claimed by the trustees.
The relevant evidence is contained in witness statements made by the trustees by the settlor's solicitor, by his independent financial adviser and by the beneficiaries. None of these witnesses was cross-examined. There was no opposition to the relief that was claimed. The respondent beneficiaries were not even represented at the hearing before the judge.
As I have said, this is an unusual claim. I shall therefore turn first to the law regarding rectification. Mistake is undoubtedly a ground on which a court may set aside or rectify a voluntary settlement. Rectification is but one aspect of a wider equitable jurisdiction to relieve parties from the consequences of their mistakes.
The judgment of Millett J in the case of Gibbon v Mitchell is a valuable illustration of the limits of the remedy of rectification. In page 5 of his judgment, having reviewed the authorities, he came to this conclusion about the jurisdiction of the court to set aside voluntary transactions on the grounds of mistake:
“In my judgment these cases show that wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponer did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it. The proposition that equity will never relieve against mistakes of law is clearly too widely stated in the authorities.”
Millett J was dealing with the jurisdiction of the court to set aside a voluntary transaction on the ground of mistake. But Millett J made it clear that it was not a mistake of the kind for which rectification was available. On the facts the settlor's intention was to make a marriage settlement but it could not be carried out either by the deed which he executed or by that deed as rectified, or indeed by any other deed, because what was required, on the facts of that case, was an application to the court under the Variation of Trusts Act 1958. It was apparent from the face of the marriage settlement itself that the settlor was mistaken in thinking that it was legally possible for him to effect his intentions by the deed which he executed. But the judge made it clear that the remedy was not to rectify the settlement but to set it aside and then to make an application to the court under the Variation of Trusts Act. Such an application was then made in that case and it was granted by Millett J.
The relevance of that case to this is as follows. The trustees here do not ask this court to set aside the settlement on the grounds that a mistake was made by the settlor in executing a discretionary settlement instead of an interest in possession settlement. This is not surprising. The effect of setting aside this settlement would be that the funds would then form part of the settlor's estate and would be liable to inheritance tax. It is, of course, impossible for any new settlement to be executed, which would have the tax advantages that the settlor and his advisers hoped to achieve.
The attraction of rectification is that, if it is available here, it will operate ex tunc and the disposition in favour of the children in the trust would take effect under the rectified settlement as from 18 December 1995, from which date the settlor lived more than the seven years that were necessary to achieve the tax saving.
I now turn to the trustees' arguments on this appeal. I will comment on them in the course of setting out my reasons for the decision that I have reached. The judge said that the function of the discretionary equitable remedy of rectification is:
“to enable the parties to correct the way in which their transaction has been recorded”.
In other words, rectification is about putting the record straight. In the case of a voluntary settlement, rectification involves bringing the trust document into line with the true intentions of the settlor as held by him at the date when he executed the document. This can be done by the court when, owing to a mistake in the drafting of the document, it fails to record the settlor's true intentions. The mistake may, for example, consist of leaving out words that were intended to be put into the document; or putting in words that were not intended to be in the document; or through a misunderstanding by those involved about the meanings of the words or expressions that were used in the document. Mistakes of this kind have the effect that the document, as executed, is not a true record of the settlor's intentions.
Rimer J correctly commented that this case is far removed from the usual type of case in which rectification is, or might be, available. It is not a matter of correcting a mistake made in recording the settlor's intentions by inserting words or deleting words, or putting in different words because the words that are there have the wrong meaning. The claim made by the trustees involves substituting a wholly different settlement, an interest in possession settlement, in the place...
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