Pitt and another v Holt and another; Futter and another v Futter and Others

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Lloyd,Lord Justice Longmore,Lord Justice Mummery
Judgment Date09 Mar 2011
Neutral Citation[2011] EWCA Civ 197
Docket NumberCase Nos: A3 2010/0385 and 0762 Appeal0762

[2011] EWCA Civ 197

[2010] EWHC 45 (Ch) (Pitt v Holt)

[2010] EWHC 449 (Ch) (Futter v Futter)

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Robert Englehart Q.C.

Mr Justice Norris

Before: Lord Justice Mummery

Lord Justice Longmore

and

Lord Justice Lloyd

Case Nos: A3 2010/0385 and 0762

Appeal 0385

Appeal0762

Between
(1) Patricia Madge Pitt
(2) David Neville Waite Shores
Claimants Respondents
and
(1) David Langford Holt
Defendant Respondent
(2) The Commissioners for Her Majesty's Revenue and Customs
Defendants Appellants
Between
(1) Mark Stephen Futter
(2) Clive Donald Cutbill
Claimants Respondents
and
(1) Elizabeth Gaye Futter
(2) Adam Jacob Futter
Defendants Respondents
(3) James Daniel Futter
(4) Natalie Helen Futter
(5) the Commissioners for Her Majesty's Revenue and Customs
Defendants Appellants

Philip Jones Q.C. and Ruth Jordan (instructed by the Solicitor to the Commissioners for HM Revenue and Customs) for the Appellants in both appeals

William Henderson (instructed by Thring Townsend Lee & Pembertons) for the Respondents in Pitt v Holt, appeal 2010/0385

Richard Wilson and Jennifer Seaman (instructed by Withers LLP) for the Respondents in Futter v Futter, appeal 2010/0762

Hearing dates: 24 to 26 November 2010

Lord Justice Lloyd

Lord Justice Lloyd:

Introduction—general

1

Two questions arise in these appeals. The first can be stated, broadly, in this way. Trustees of a settlement exercise a discretionary power intending to change the beneficial ownership of trust property, but the effect of what they do turns out to be different from that which they intended. Can their act be set aside by the court? If so, what is the correct legal test to determine in what circumstances and on what basis the court can intervene? The second question concerns the correct legal test to be applied if a donor seeks to have a voluntary disposition set aside as having been made under a mistake.

2

In 1974 the Court of Appeal heard an appeal from an order of Plowman J in proceedings between the executors of the late Captain Peter Hastings-Bass and the Inland Revenue. The issue was whether estate duty was chargeable in respect of his death in 1964 on certain funds comprised in a settlement made in 1947 under which he had had a protected life interest. It held that the funds had been the subject of a valid advancement in 1958 under which a life interest subsisted in favour of his son William. It was valid even though the interests which had been intended to take effect subject to that life interest were void because of the application of the rule against perpetuities. It followed that this fund was not chargeable to estate duty on Captain Hastings-Bass' death. Re Hastings-Bass deceased is reported at [1975] Ch 25.

3

In a succession of later cases at first instance, starting in 1990 with a pension case, Mettoy Pension Trustees Ltd v Evans [1990] 1 W.L.R. 1587, a principle, described as the rule in Re Hastings-Bass, has been developed and applied to facts very different from those under consideration in Re Hastings-Bass itself. As so developed, the principle is that the exercise of a discretionary dispositive power by trustees may be declared void and set aside, even many years after the event, on the basis that the trustees failed to take into account relevant matters when exercising the power. Often it was applied where the failure was in understanding the tax liabilities that would arise from the exercise. Without prejudice to its correct status or description, I will use the label the Hastings-Bass rule in this judgment to refer to the principle so developed.

4

One of the more recent of that sequence of decisions, Sieff v Fox, [2005] EWHC 1312 (Ch), [2005] 1 W.L.R. 3811, was the last case which I heard as a High Court Judge. I was then able to subject the principle to quite full consideration, as a result of the able and adversarial argument addressed to me, but I was of course constrained by the rules of judicial precedent, sitting at first instance. At the end of my judgment I said that the principle needed to be reviewed by the Court of Appeal, but my decision was not itself the subject of an appeal.

5

Now on two distinct appeals that principle, and those cases, have come to be considered in the Court of Appeal for the first time. By coincidence this comes within a few months of the death of Captain Hastings-Bass' widow, Mrs Priscilla Hastings. We are bound by the decision in Re Hastings-Bass itself, but by no other decision on the point since then. The case has been mentioned in one intervening decision of the Court of Appeal, but that did not affect the status or content of the principle.

6

There are two principal reasons why the point has not been the subject of an appeal in the meantime. The first is that the decisions have, by and large, suited the parties to the proceedings. The second and more important is that, after its defeat in Re Hastings-Bass itself, the Revenue chose not to take part in any of the intervening proceedings. I commented on that policy in paragraph 83 of my judgment in Sieff v Fox. Whether because of that or otherwise, HMRC (as they are now) changed their policy of non-participation. They were joined as Defendants in these two proceedings, and they have brought the appeal in each.

Introduction— Pitt v Holt

7

This appeal is from an order of Mr Robert Englehart Q.C. sitting as a Deputy High Court Judge in the Chancery Division, made on 18 January 2010. The facts of this case are rather different from those of previous cases in the sequence.

8

Mrs Pitt is the widow and personal representative of Mr Derek Pitt, and was at the material time his receiver appointed by the Court of Protection. He was very badly injured in a road accident in 1990. His personal injury claim was compromised in May 1994 on the basis of a structured settlement under which a lump sum was payable as well as monthly payments. (These are not strictly an annuity, but it is convenient to refer to the right to receive them as an annuity.) With the benefit of professional advice it was decided to put both the lump sum and the annuity into a trust for Mr Pitt's benefit. The Court of Protection gave its authority to Mrs Pitt to do so in September 1994. As his receiver she entered into a Deed of Settlement, under which the lump sum was to be held on trust, and she then assigned the annuity to the trustees to be held on the same trusts. The trustees were Mrs Pitt, Mr Shores (the Second Claimant) and a Mr Field, who has since been replaced by Mr Holt, the First Defendant. The settlement created discretionary trusts of income and capital for the benefit of Mr Pitt, his wife, children and remoter issue during his lifetime. It was to be known as the Derek Pitt Special Needs Trust, and I will refer to it as the Special Needs Trust. Upon his death the whole fund was to be held on trust for his personal representatives for the benefit of his estate.

9

Mr Pitt died in September 2007. Probate of his will was granted to Mrs Pitt and Mr Shores. Mrs Pitt is, in the events which happened, the sole beneficiary of the estate. In the meantime it had been realised in 2003 that the terms of the Special Needs Trust were such that inheritance tax (iht) applies to it as to any ordinary discretionary trust. There is a charge to iht on the whole value of the sum put into the trust at the outset, this being a transfer of value by Mr Pitt; there would be a charge to iht on any capital paid out of the trust; and there would also be a charge to iht on the value of the property the subject of the Special Needs Trust every ten years after its creation. On the basis that the assets put into the Special Needs Trust at the outset were valued at around £800,000, the initial charge to iht would be of the order of £100,000.

10

It would have been easy to crea the settlement in a way which did not have these tax consequences. Section 89 of the Inheritance Tax Act 1984 excludes from this treatment some discretionary trusts for disabled persons. One additional provision would have been needed, namely a clause under which at least half of the trust fund applied during Mr Pitt's lifetime was to be applied for his benefit. That could easily have been added; the actual distribution of the fund would have complied with it.

11

At the time of Mr Pitt's death little more than £6,000 remained in the Special Needs Trust, and the annuity came to an end on that event.

12

Before his death Mr Pitt, together with Mrs Pitt, Mr Holt and Mr Shores, brought proceedings against the financial advisers on the basis of whose advice the Special Needs Trust was set up. That claim is resisted, and has been stayed pending the outcome of these proceedings.

13

By the present proceedings Mrs Pitt and Mr Shores, as personal representatives of Mr Pitt and in Mrs Pitt's case also personally, claimed a declaration that the settlement by which the Special Needs Trust was created, and the assignment of the annuity, were void or alternatively voidable and ought to be set aside. Mr Holt was joined as Defendant as the other trustee of the Special Needs Trust, and HMRC were also joined with their agreement. The relief sought was put on the basis of the Hastings-Bass rule or alternatively on the ground of mistake.

14

In his judgment, [2010] EWHC 45 (Ch), the judge held that the settlement and the assignment were to be set aside under the Hastings-Bass rule, though he would not have come to the same conclusion on the basis of mistake. He did not have to decide whether the transactions were void or...

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