Stephane Etroy v Speechly Bircham LLP
| Jurisdiction | England & Wales |
| Judge | Ms Clare Ambrose |
| Judgment Date | 23 February 2023 |
| Neutral Citation | [2023] EWHC 386 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2021-000898 |
[2023] EWHC 386 (Ch)
Ms Clare Ambrose SITTING AS A DEPUTY HIGH COURT JUDGE
Case No: BL-2021-000898
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Royal Courts of Justice
7 Rolls Buildings, Fetter Ln,
London EC4A 1NL
Richard Wilson KC and Jamie Randall (instructed by Withers LLP) for the Claimants
Michael Pooles KC (instructed by RPC LLP) for the Defendant
Hearing dates: 3, 6, 7 February 2023
Judgment supplied to the parties in draft on 13 February 2023
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Ms Clare Ambrose SITTING AS A DEPUTY HIGH COURT JUDGE
Introduction
This is the trial of a preliminary issue as to whether the Claimants' claims for negligent tax advice are time-barred.
The claims are made by Mr Stephane Etroy (an individual resident in London) and the Second Claimant (a professional provider of trusts services based in Jersey) for damages for negligent tax advice given by the Defendant, Speechly Bircham LLP to Mr Etroy in 2009. Pursuant to that advice the Second Claimant (“RBC”) established a trust and was appointed as the professional trustee. They allege that they have incurred tax liabilities of over £1 million as a result of that advice.
The Defendant was a solicitors' firm that held itself out as a specialist in private client matters including inheritance tax. It subsequently merged to become Charles Russell Speechlys LLP.
The Claimants issued a claim form on 26 May 2021. The Defendant maintained that the claims were statute-barred because the alleged tort arose more than 6 years earlier. The Claimants maintain that the action is not time-barred because, pursuant to section 14A of the Limitation Act 1980, the earliest date on which they acquired the knowledge required for bringing their action was on 28 September 2018, less than 3 years prior to issuing their claim form. On 22 February 2022 Deputy Master Nurse ordered that there should be a trial of the time-bar issue, namely as to whether the claims were brought within the time permitted by section 14A of the Limitation Act.
The Defendant's advice, its breach of duty and the alleged damages
There was common ground as to the advice provided by the Defendant and also as to its breach of a duty of care owed to Mr Etroy. In particular, in September 2009, Mr Etroy instructed the Defendant to advise him and the scope of work included advising on the creation of a new discretionary trust.
At a meeting on 22 September 2009 Mr Charles Gothard of the Defendant and Mr Etroy discussed an existing trust, named the Helios April Trust (“HAT”) that had been set up in 2002 in Jersey, and under which Mr Etroy held an interest in possession. Detailed written advice was not given but a note of the advice was made. In summary, Mr Gothard advised Mr Etroy that:
a) As Mr Etroy was not domiciled or deemed domiciled in the UK when he established the Helios April Trust in 2002, as it then stood the trust held excluded property for inheritance tax (“IHT”) purposes.
b) However, if the second to die of the Mr Etroy and his wife were deemed to be domiciled in the UK at the time of his or her death and had a life interest in the Helios April Trust, section 80 of the Inheritance Tax Act 1984 ( IHTA 1984) would apply. The status of the Helios April Trust would be reassessed and it would not be treated for IHT purposes as an excluded property settlement pursuant to section 48 of the IHTA 1984.
c) In order to deal with this difficulty, the assets of the Helios April Trust should be transferred to a new discretionary settlement, to which section 80 of the IHTA 1984 would not apply (by virtue of Mr Etroy not having any interest in possession under it) and of which RBC would be the trustee.
Mr Etroy followed this advice and the assets held within the HAT were transferred to a new discretionary trust governed by the law of the Cayman Islands. The new trust was named the Helios May Trust (“HMT”).
The Defendant accepts that it was in breach of its duty to Mr Etroy in failing to appreciate that there were UK situs assets held by the Helios April Trust, and in failing to mitigate IHT charges. There is an issue as to whether the Defendant owes a duty of care to RBC but for the preliminary issue it is assumed that there was an actionable breach.
The crux of the Claimants' complaint against the Defendant is that because of its negligent failure to appreciate that the trust assets in question were UK assets (or to give advice to mitigate the tax consequences), the creation of the Helios May Trust caused the following significant tax charges and costs, for which they seek compensation:
a) A charge under section 1 of the IHTA 1984 occasioned by the transfer of assets from the Helios April Trust to the Helios May Trust of £1,057,069.82 (this is an entry charge) plus interest and penalties;
b) A charge under section 64 of the IHTA 1984 that arose on 31 July 2012 of £66,460.09 (this is a principal charge in respect of additions to the Helios May Trust made prior to 22 March 2006) plus interest and penalties;
c) Legal costs paid to the Defendant for its advice (£19,000) plus costs incurred in implementing the advice;
d) Costs (of approximately £480,000) including costs incurred by the Claimants' accountants PwC (at around £102,000), legal costs and RBC's costs.
In the Claimants' skeleton argument and opening their counsel took considerable time to explain the inheritance tax background against which the preliminary issue was to be decided. This explanation was presented in as summary and simple terms as possible, but it was lengthy and complex. It was significant that the Defendant took no issue with the content or relevance of this explanation (or the fact that it presented something of a simplification).
This explanation of the statutory background was necessary to make proper sense of the claims made, the correspondence that was relied on by both sides, the nature and significance of the new trust that Mr Etroy was advised to create and also his original trust and five separate trusts (“the Five Trusts”) set up by his former colleagues which were being considered in much of the correspondence relied on. The explanation was also necessary to understand the significance of the Defendant's acts and omissions which are alleged (and admitted in relation to Mr Etroy) to constitute negligence, the damage in respect of which damages are claimed, and the Claimants' case as to why that damage is attributable to the Defendant.
I rely on the Claimants' explanation of the tax background and some of the terminology adopted, including the term principal charge and entry charge, which has been simplified for convenience. Given that there was no issue as to the background law and its application I do not set it out. I flag up particular features of the tax background and its significance for the issues to be decided. In the interests of brevity in dealing with a complex area, these features are presented in simplistic terms without attempting to provide full accuracy, including as to the legal or technical terms or details.
a) The IHTA 1984 has rules as to what property counts within an individual's estate for IHT purposes. Where property on trust is held under what is called the “relevant property” regime it will be treated as outside the beneficiary's estate. However, it is subject to a principal charge on the trust's 10 year anniversary, sometimes also described as a 10 year charge.
b) The location of an asset is relevant for tax purposes and covered in the UK rules. The word “situs” reflects the place of an asset for tax purposes and is commonly used in that context.
c) Prior to 22 March 2006 there was a very significant difference in the tax treatment of a discretionary trust (where the trustees have discretion over the interests) and a trust in which interests in possession subsist (i.e. where the beneficiary has more immediate rights to the income), of which a common form is a life interest trust. One difference was that interests in possession were not treated as relevant property and were not subject to the 10 year principal charge. Consequently, where a person transferred property into a trust in which interests in possession subsisted, there was no chargeable event (i.e. a tax liability did not arise), but tax was charged when the interest terminated (whilst the charge arises on the trust in which the interest in possession subsisted, where it arises on a transfer to a relevant property trust, it is often referred to as an entry charge). By contrast in a discretionary trust there was a principal charge on the trust's 10 year anniversary, but the death of the beneficiary would not be a chargeable event.
d) The Finance Act 2006 significantly changed the tax regime for trusts. For UK situs assets settled after 22 March 2006 it removed some of the differences between discretionary trusts and life interest trusts. One change was that assets added to trusts in which there were interests in possession arising after 22 March 2006 were treated as relevant property.
e) This meant that post 22 March 2006 additions of UK situs assets to trusts were treated as relevant property falling within the UK inheritance tax regime (and subject to a 10 year charge) even if the assets were held in a life interest trust. These additions would attract an entry charge and a 10 year principal charge.
f) Therefore UK situs assets added after 22 March 2006 to the HAT, and later to the HMT, would attract a principal charge. This charge would apply whether the...
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