Pitt and another v Holt and another; Futter and another v Futter and Others
| Jurisdiction | England & Wales |
| Judgment Date | 18 January 2010 |
| Neutral Citation | [2010] EWHC 236 (Ch),[2010] EWHC 45 (Ch) |
| Docket Number | Claim No: HC09C00303 |
| Court | Chancery Division |
| Date | 18 January 2010 |
Before: Robert Englehart QC
(Sitting as a Deputy Judge of the Chancery Division)
Claim No: HC09C00303
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
William Henderson (instructed by Thring Townsend Lee & Pembertons) for the Claimants
Sarah Harman (instructed by the Solicitor for HM Revenue and Customs) for the 2 nd Defendants
PRELIMINARY
The First Claimant, Mrs Pitt, seeks declarations to the effect that she is entitled to unravel a settlement and an assignment made by her as receiver for her late husband on 1 November 1994. I shall call them respectively the Settlement and the Assignment. Her late husband had been seriously brain damaged in a road accident. It was decided to put the money to which he became entitled under a compromise of his damages claim, and which was needed for his care, into a settlement. However, the Second Defendant (“HMRC”) says—correctly—that the form of settlement adopted was such that a liability arose to inheritance tax under the Inheritance Tax Act 1984; the tax became payable (1) on the creation of the Settlement (2) on subsequent capital distributions (3) after 10 years and (4) on Mr Pitt's death. The inheritance tax position was not taken into account at all by Mrs Pitt and her advisers when the Settlement was set up. If it had been appreciated, it would have been clear that it would have a serious impact on the worth of Mr Pitt's damages. But, the problem could readily have been resolved by the adoption of a different form of settlement. As it is, Mrs Pitt now has to accept that HMRC is correct and that there is a large inheritance tax liability unless the Settlement can be set aside.
Quantification of the amount of tax involved is not yet possible, and both Counsel were reluctant even to suggest an approximate figure to me. The uncontroverted evidence is, however, that the present liability including both interest and penalties (if exacted) would be between £200,000 and £300,000. And Counsel were at least agreed that the initial tax charge on the setting up of the Settlement and the Assignment would have been in the order of some £100,000.
On Mrs Pitt's case before me the Settlement and the Assignment may be avoided because the inheritance tax position was simply ignored at the time the arrangements were made. She seeks to make out this case on either or both of two grounds: (1) the so-called rule in Hastings-Bass and (2) mistake. If she succeeds, then the current tax liability will disappear whether because the transactions were void at the outset or pursuant to section 150 of the Inheritance Tax Act 1984. For its part, HMRC contends that the rule in Hastings-Bass does not apply in the present context and in any event that its development in a number of first instance decisions has taken a wrong turn. HMRC also submits that there was here no operative mistake. It expresses sympathy with Mrs Pitt's position but says that her remedy, if any, lies against her former advisers.
The claim came on for hearing before me as a Part 8 claim. Mrs Pitt, the First Claimant, is both a personal representative of Mr Pitt and the sole beneficiary under his Will. She was also his receiver by appointment of the Court of Protection, and she is one of the trustees of the Settlement. The other Claimant, Mr Shores, is also a personal representative of Mr Pitt and a trustee of the Settlement. The First Defendant, Mr Holt, did not appear before me and has taken no part in the action; he was joined as a party because he is the other trustee of the Settlement. The effective Defendant resisting the claim is HMRC. All the evidence was given in witness statements, and there was no cross-examination. The material facts were not in dispute at all.
THE FACTUAL BACKGROUND
Mr and Mrs Pitt were persons of relatively modest financial resources who lived together in a farm house near Frome. On 6 April 1990, which seems to have been his 57 th birthday, Mr Pitt was badly injured in the road accident which I have mentioned. He suffered multiple injuries including, in particular, very serious head injuries such that he became permanently unable to manage his own affairs. Mrs Pitt was accordingly appointed his receiver under the Mental Health Act 1983 by the Court of Protection.
Proceedings were commenced in the Bristol District Registry in the name of Mr Pitt, acting by Mrs Pitt as his next friend, for damages for negligence against a Mr Breen. It seems that an interim payment of £350,000 was made by Mr Breen's insurers. Ultimately, the whole damages claim was compromised for £1.2 million with the approval of the Court being given on 9 May 1994. It was agreed that the compromise was to be implemented by way of a structured settlement. The structured settlement involved payment to Mr Pitt of a lump sum, the previously paid interim payment having been apparently spent, with Mr Breen's insurers undertaking to pay Mr Pitt an index linked annuity of £2,418.75 per month during his lifetime.
Mrs Pitt was advised by solicitors. She also retained financial advisers, then called Frenkel Topping Limited and now called Frenkel Topping Financial Services Limited. I shall refer to them as Frenkel Topping. They were concerned to assist Mrs Pitt with devising financially prudent arrangements for dealing with the proceeds of the compromise in the best way to provide for Mr Pitt's needs. It was decided that the best way to proceed would be for the cash to be invested and put into a settlement into which the annuity would also be assigned.
The documents show that there were two main expressed reasons why the creation of a settlement so as to divest Mr Pitt of both the lump sum and the annuity was thought desirable: first, it was thought that any potential means tested reduction of state benefits for Mr Pitt would thereby be avoided and, secondly, there was a suggestion that the funds might be sheltered from a sizeable monetary claim which Mr and Mrs Pitt's bank had against them. I make no comment on the efficacy under either head. It is, however, possibly of some materiality to say that in the event Mr Pitt never did receive any means tested state benefits. A third possible reason as explained by Mr Henderson on behalf of the Claimants would have been that, with the funds being taken out of Mr Pitt's own control, continuing Court of Protection charges would be avoided.
The documents before me suggest that Frenkel Topping gave thought to the creation of two forms of discretionary settlement, one under which Mr Pitt would be the sole beneficiary and another under which the discretionary beneficiaries would also include Mrs Pitt and their children. In the event Mrs Pitt, acting of course on the advice of her advisers, decided that the sensible course would be to create a discretionary settlement under which she and the children would also be beneficiaries along with Mr Pitt. A proposal to that effect was therefore put forward to the Court of Protection. It was supported by a report from Frenkel Topping, of which only an unsigned draft is currently available to Mrs Pitt, and an affidavit from the solicitor then representing Mr and Mrs Pitt. The documents before me show Frenkel Topping addressing questions of both income tax and capital gains tax. However, nobody (including the Official Solicitor who represented Mr Pitt before the Court of Protection) gave any thought at all to the question of liability for inheritance tax upon the transfer of assets into a discretionary trust and the trust's subsequent operation.
On 12 September 1994 the Court of Protection made an Order authorising Mrs Pitt, as Mr Pitt's receiver and in his name, to execute a settlement and an assignment of the annuity into the settlement in approved forms. This followed an earlier hearing before, and amendments to the proposed form of the documents by, the Master of the Court of Protection. Mr Henderson emphasised before me that the Order of 12 September 1994 did not direct Mrs Pitt to execute the documents. It only gave her the authority. Hence, she was not obliged to enter into the transactions and would still have had discretion to refrain from doing so if it were not in the best interests of Mr Pitt.
Armed with authority from the Court of Protection, on 1 November 1994 Mrs Pitt as receiver for and in the name of Mr Pitt executed both documents. Under the terms of the Settlement, £412,414.22 plus interest, which had remained in court on compromise of the case against Mr Breen, plus any subsequently transferred assets was to be the trust fund and to be vested in trustees. The trust fund was to be held on discretionary trusts under which the beneficiaries were Mr Pitt, Mrs Pitt, and his children and remoter issue. The only constraint was that there could be no distribution to the children and remoter issue without the consent of the Court of Protection. On Mr Pitt's death any balance of the trust fund was to be transferred to his estate, and it was also provided that subject to the approval of the Court of Protection Mr Pitt was to be entitled to revoke the trusts, wholly or in part. On the same day Mrs Pitt also executed for Mr Pitt the Assignment of the annuity to the trustees of the Settlement so that it was added to the trust fund.
The prime purpose of the trust fund within the Settlement was, of course, to provide for Mr Pitt's future care. If any thought had been given to the inheritance tax position, the objective could readily have been achieved by the creation of a settlement which would have been exempt from inheritance tax. Discretionary trusts for disabled persons are expressly given exemption under section 89 of the Inheritance Tax Act 1984. The only modification...
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