Futter and Another v Futter and Others

Mr Justice Norris :

When the Court of Appeal fashioned for the trustees of the 1947 settlement upon Captain Hastings-Bass a stout shield against an attack upon the validity of their decisions by the Inland Revenue, the members of the court cannot have supposed that they were creating for such trustees a powerful weapon enabling them to attack their own decisions in the face of objections by the Inland Revenue. But that, of course, is what has occurred in the development of what is called “the Rule in Hastings-Bass” ( Re Hastings-Bass[1975] Ch 25).

This is another application by trustees who wish to assert that they have acted in an untrustee-like fashion and so have failed properly to exercise a power vested in them. The trustees wish to take advantage of this failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability consequent upon the trustees' decision. Put like that (and I am conscious that that is not the only way in which the situation may be described) the possibility is raised that the development of the Rule may have been diverted from its true course. Such a suggestion is canvassed in an article by Lord Walker (“ The Limits Of The Principles In Re Hastings-Bass” Private Client Business 26 February 2002): in a lecture by Lord Neuberger (“Aspects of the Law Of Mistake” a lecture to the Chancery Bar Association on 16 January 2009) and in an article by Mr Mark Herbert QC (“ Is Hastings-Bass a Hardy Perennial?” 2009 Trust Quarterly Review volume 7 issue 1 page 14).

This is not an occasion for a judge at first instance to indulge in reconsideration of the Rule (itself developed at first instance). My task is to decide the case before me in accordance with the established rules of precedent. Where a decision at first instance has itself been considered by a second judge at first instance, I do not regard myself as free to depart from the second decision (unless persuaded that some binding or persuasive authority has been overlooked): Colchester Estates v Carlton Industries [1984] 2 All ER 601. Adopting this approach I may start with the judgment of Lloyd LJ (sitting as a judge of the Chancery Division) in Sieff v Fox[2005] EWHC 1312 which considered the Rule and the authorities from which it was derived; and at this stage to draw from that decision three points.

First, the formulation of the principle. This is found at paragraph 119 of the judgment in these terms:-

“The best formulation of the principle seems to me to be this. Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have take into account”.

Second, the significance of that formulation. At paragraph 58 of his judgment Lloyd LJ had observed that “the precise formulation of the principle may be of greater significance in cases other than this one” and he noted that the formulation had (in a very slightly different form) been promoted by Mr Herbert QC and accepted for the purposes of the case itself by Mr Taube QC, so Counsel had agreed upon the matter. Nonetheless, at first instance Lloyd LJ's formulation is to be treated as a comprehensive exposition (per Sir Andrew Park in Smithson v Hamilton[2007] EWHC 2900 at paragraph 52) and a comprehensive synthesis of the current state of the law (per Mr Robert Englehart QC in Pitt v Holt[2010] EWHC 45 (Ch)).

Third, the boundaries of the principle. Lloyd LJ appears to have shared the view expressed by Park J in Breadner v Granville Grossman [2001] 1 Ch 523 that it cannot be right that whenever trustees do something which they later regret and think that they ought not to have done, then they can say that they never did it in the first place. But he expressed the view that

“…the main ways at present open to the court to control the application of the principle are: (a) to insist on a stringent application of the tests as they have been laid down, (b) to take a reasonable and not over-exigent view of what it is that the trustees ought to have taken into account, and (c) to adopt a critical approach to contentions that the trustees would have acted differently if they had realised the true position….”

It is in that context that I turn to the present case.

The relevant facts may be shortly stated. On 5 August 1985 Mark Futter created the Futter (No.3) Life Interest Settlement (“the No.3 Settlement”).Clause 4 of the No.3 Settlement gave the income from the trust fund to Mark Futter for his life but conferred on the trustees a conventional power of enlargement.Clause 5 then gave Mark Futter a power of appointment. In exercise of that power, on 24 November 1993 Mark Futter declared new trusts to take effect from and after his death. He granted a life interest to the First Defendant Elizabeth Gaye Futter (his wife) (again subject to a conventional power of enlargement) and then gave the capital to such of the SEond to Fourth Defendants Adam, James and Natalie (his children) as should attain 18 or be alive at the end of the trust period. On 31 March 2008 Mark Futter and the other trustee Mr Clive Cutbill executed a Deed of Advancement terminating the No.3 Settlement. They did so by exercising the power of enlargement conferred by clause 4 of the No.3 Settlement with the effect that the entire capital of the fund became payable to Mark Futter freed and discharged from the trusts of the No.3 Settlement and of the 1993 Deed of Appointment.Clause 3 of the Deed of Advancement said that “any…capital gains tax…payable in respect of the Trust Fund by reason of the provisions of this Deed shall be borne by the Trust Fund”. The payment to Mark amounted to £141,952 and incurred a charge to capital gains tax (“CGT”) in the sum of £90,849.

On 5 August 1985 Mark Futter created the Futter (No.5) Life Interest Settlement (“the No.5 Settlement”). By clause 4 Mark Futter retained a life interest in the Trust Fund.Clause 5 conferred upon him a power of appointment over income and capital amongst a defined class, and subsequent clauses declared default trusts.Clause 11 of the No.5 Settlement contained the usual enhancements to the statutory power of advancement under section 32 of the Trustee Act 1925. On 24 November 1993 Mark Futter exercised his power of appointment. The Deed of Appointment of that date provided that from and after the death of Mark Futter there was a trust to pay the income of the fund to the Elizabeth Gaye Futter (with a power of enlargement), and subject thereto the Trust Fund was to be held upon trust for such of the Second to Fourth Defendants Adam, James and Natalie (his children) as should be living at the expiration of the trust period or should previously have attained the age of 18 years. The shares in the Trust Fund so conferred were then, by clause 8 of the No.5 Settlement, resettled upon each primary beneficiary for his or her life, with a power of appointment vested in the primary beneficiary and a default trust in favour of the children of the primary beneficiary born during the trust period. On 3 April 2008 Mark Futter and his co-trustee Mr Cutbill (with his own consent and that of Elizabeth Gaye Futter) exercised the power of advancement conferred by section 32 and extended by clause 11 of the No.5 Settlement to apply £12,000 in cash to each of Adam, James and Natalie.Clause 4 of the Deed of Advancement declared that any CGT payable in respect of the Trust Fund by reason of the provisions of the Deed would be borne by the Trust Fund. The consequence of executing this deed was that each of Adam, James and Natalie became liable to pay CGT in the sum of £1,792.

The thinking which led in April 2008 to the exercise of the power of enlargement and the exercise of the power of advancement is recorded in the attendance notes of the trustees' solicitors, Withers. The No.3 Settlement and the No.5 Settlement each contain “stockpiled gains” for CGT purposes. It was anticipated that if those “stockpiled gains” were brought onshore after 5 April 2008 they would be taxed at an overall effective rate of 28.8%, so that the total CGT liability for winding up the No.3 Settlement and the No.5 Settlement was likely to be in the region £163,000. However, the suggestion had been made that if smaller capital distributions were made on an annual basis to Mark Futter or to other beneficiaries then advantage could be taken of the recipients' annual exemption from CGT. Accordingly, on 16 January 2008 it was thought that the No.3 Settlement and the No.5 Settlement might (subject to fiduciary considerations) be wound up over the course of a number of years by making capital payments to Mark Futter and his family in such sums as would use each of their annual exemptions. The position was further...