Bhaur v Equity First Trustees and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Snowden,Lord Justice Arnold,Lord Justice Lewison |
| Judgment Date | 18 May 2023 |
| Neutral Citation | [2023] EWCA Civ 534 |
| Docket Number | Case No: CA-2022-000357 |
| Court | Court of Appeal (Civil Division) |
[2023] EWCA Civ 534
Lord Justice Lewison
Lord Justice Arnold
and
Lord Justice Snowden
Case No: CA-2022-000357
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN BIRMINGHAM
PROPERTY, TRUSTS AND PROBATE LIST
Mr. Justice Marcus Smith
Royal Courts of Justice
Strand, London, WC2A 2LL
David Mitchell (instructed by Kangs Solicitors) for the Appellants
Michael Avient (instructed by Greenwoods Legal LLP) for the Third Respondent
The First, Second, Fourth and Fifth Respondents did not appear and were not represented
Hearing dates: 7 and 8 February 2023
Approved Judgment
Remote hand-down: This judgment was handed down remotely at 12 noon on 18 May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
The appeal
This appeal concerns the court's equitable jurisdiction to set aside a voluntary disposition of assets on the ground of mistake in the context of a failed inheritance tax avoidance scheme.
It is an appeal against a decision of Marcus Smith J (the “Judge”) given after a six-day trial: see [2021] EWHC 2581 (Ch) (the “Judgment”). The Judge refused a claim by the Appellants to set aside the disposition of assets in question because he held that they had made no relevant mistake when entering into a tax avoidance scheme (the “Scheme”) which involved an employee benefit trust. The Scheme had been devised by the Third Defendant (“Mr. O'Toole”) who was a solicitor and operated a tax advisory business under the name “Aston Court”. The Scheme was marketed as an “Asset Liberation Solution” and the Appellants paid substantial fees to Aston Court for their services.
The Judge held that the Scheme did not merely involve tax avoidance, but that it amounted to tax evasion because the picture that was presented to HMRC was of a trust which was genuinely intended to benefit qualifying employees of the Fifth Appellant company (“Safe Investments UK”), when there was in fact no intention whatever to benefit any such employees. The Judge held that in this respect, Mr. O'Toole dishonestly intended to mislead HMRC, and that the Appellants knew of and endorsed that approach.
The background
The Judgment contains a lengthy exploration of the documents and evidence concerning a complex series of events spanning more than a decade. It is, however, possible to deal with the appeal on the basis of a much simplified outline of the facts.
The underlying assets with which this case is concerned were the beneficial interests of the First and Second Appellants (“Mr. and Mrs. Bhaur”) in a substantial property business which they had built up over several decades and to which changes were made from time to time after the Scheme had been implemented. The beneficial interests in these assets were compendiously referred to by the Judge as “the Estate”.
After being introduced to Aston Court in late 2006, the implementation of the Scheme commenced in February 2007 when Mr. and Mrs. Bhaur incorporated their business and transferred the beneficial interests then forming the Estate to Safe Investments UK. That was a newly formed English company of which they were both directors and shareholders and with whom they both entered into contracts of employment. The transfer of the Estate was made in consideration of an issue of shares. Safe Investments UK then hived the Estate down to its newly created wholly-owned BVI subsidiary, referred to in the Judgment as “Gooch Investment”.
The voluntary disposition said to give rise to the court's jurisdiction to set aside for mistake was the disposal in March 2007 by Safe Investments UK of the shares in Gooch Investment to a BVI trust company, Equity Trust (BVI) Limited, to be held on the terms of a settlement for the benefit of qualifying employees of Safe Investments UK (the “First Staff Remuneration Trust”). The case was argued before us on the basis that the jurisdiction to set aside for mistake applies as well to voluntary dispositions by companies as to dispositions by individuals. For this purpose the relevant states of mind to be attributed to Safe Investments UK were those of Mr. and Mrs. Bhaur.
The beneficiaries of the First Staff Remuneration Trust were widely defined and included any employee or former employee or spouse, children or dependents of such employees or former employees of Safe Investments UK or any 75% or more subsidiary of that company. Importantly, however, the terms of the settlement excluded from the class of employees who could benefit from the trust, any persons who were “participators” in Safe Investments UK or persons connected with them (save to the extent that payments of income could be made to such persons).
The intention of the Scheme was that the transfer of the Estate to Safe Investments UK would be tax neutral, and the transfer of the shares in Gooch Investment into the First Staff Remuneration Trust would take advantage of a particular exemption in the Inheritance Act 1984 (the “IA 1984”) for property transferred to an employee benefit trust. I shall describe that exemption in greater detail below, but in simple terms, the supposed tax loophole which the Scheme sought to exploit was that on one reading of the relevant exemption, although Mr. and Mrs. Bhaur and their two sons (“Mandeep” and “Baldeep”) could not benefit from the First Staff Remuneration Trust whilst Mr. and Mrs. Bhaur were alive (save to the extent of payments of income), the exemption would still be available if Mandeep and Baldeep were entitled to benefit from distributions of assets from the trust after Mr. and Mrs. Bhaur died, and could do so free of inheritance tax.
The Scheme was, however, challenged by HMRC, who served a statutory notice on Safe Investments UK in July 2010. HMRC contended that on the true interpretation of the relevant provisions of the IA 1984, the disposals by Safe Investments UK did not qualify for the relevant tax exemption because of the possibility that Mandeep and Baldeep might eventually benefit from the First Staff Remuneration Trust. That dispute and the tax consequences for the Appellants has not formally been resolved, but the claim to set aside for mistake is in part premised on the assumption that the Scheme will not only not confer the inheritance tax savings which Mr. and Mrs. Bhaur desired for Mandeep and Baldeep, but will very likely have seriously disadvantageous tax consequences for the Appellants. The Judge expressly declined to make any findings on that point, and neither do we.
Although not critical for the determination of the issues on this appeal, the arrangements recommended by Aston Court subsequently became more complex when the First Staff Remuneration Trust was in effect replaced by a second employee benefit trust on the same terms as the first (the “Second Staff Remuneration Trust”) in 2010 and 2011. That change involved the Estate being transferred by Gooch Investment to the Second Respondent, whose shares were held by the First Respondent (“Equity First”) as trustee of the Second Staff Remuneration Trust. Equity First is trustee corporation incorporated in Nevis which is connected with Mr. O'Toole and Aston Court. A Swiss company connected with Mr. O'Toole, Aston Court and Equity First (“ACCI”) was subsequently appointed as the “Protector” of the Second Staff Remuneration Trust, with significant powers in relation to it.
Thereafter, from about September 2012, when it became apparent that HMRC probably had the better of the arguments under the IA 1984, there were a series of what the Judge described as “untransparent” further changes to the structure. Again, the detail of these changes does not matter for the resolution of the issues on this appeal. Suffice to say that the Judge found that the Estate ended up being held by the Fifth Respondent (“IVM PCC”) which is a Mauritius protected cell company capable of holding assets for the benefit of different shareholders of the company in segregated “cells”. The shares in “Cell 020” relating to the Estate were held pursuant to the terms of a Mauritius purpose trust which the Judge found was a sub-trust of the Second Staff Remuneration Trust.
In 2016 HMRC pursued investigations into a number of the tax schemes promoted and administered by Mr. O'Toole and Aston Court. This seems to have prompted Equity First to seek to administer the Second Staff Remuneration Trust according to its terms, making proposals in 2017 to distribute £120,000 in income derived from the Estate to each of Mr. and Mrs. Bhaur, Mandeep and Baldeep. These proposals were strongly opposed by the Bhaur family, who stated that they had no need or desire for such income, and that they “would be demotivated to work for direct remuneration” if such payments were made.
This disagreement was not resolved, and in late January 2017 Equity First nonetheless passed resolutions to make the proposed distributions to the members of the Bhaur family together with other distributions to “unconnected employees”. It also resolved to collapse the Mauritius sub-trust structure and to approach ACCI to use its powers as Protector to appoint a UK charitable beneficiary that could benefit from the Second Staff Remuneration Trust at any time.
When the Bhaur family continued to object and...
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Tax Disputes Briefing: Court Of Appeal Refuses To Reverse Artificial Tax Avoidance Scheme On Grounds Of Mistake.
...recent case of Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 534, the Court of Appeal (CoA) had to consider whether to allow taxpayers to undo, on the grounds of mistake, a voluntary disposition of their assets entered into as part of a tax avoidance 1 Back......