Prior to this decision, the courts confirmed in the case of Hastings-Bass that they could overturn an action carried out by a trustee or fiduciary exercising a discretionary power if:
- The effect of exercising the power differs from the intention;
- The trustees would not have acted in the manner they did if they had not failed to take into account considerations that they should have taken into account or took into account something they should not have done so
This principle is commonly referred to as the rule in Hasting-Bass (“the rule”) as it developed from the case of the same name ( Ch 25).
In the case of Futter, the Trustees had taken incorrect advice from solicitors relating to the effects of capital gains tax on distributions out of the settlement in question and acted upon that advice. This resulted in a larger tax liability than was expected and the Trustees looked to have their actions set aside based on the rule. HMRC challenged this.
In the case of Pitt, Mrs Pitt was appointed as a Receiver (Fiduciary) for her husband who had suffered brain damage in a road accident resulting in the loss of his mental capacity. An award of £1.2 million was made by way of part of a settlement for the injuries suffered and solicitors acting for Mrs Pitt took advice from a firm of financial advisers. They advised on the setting up of a discretionary trust. However, the creation of the trust attracted inheritance tax charges. A trust could have been established in such a way so that inheritance tax charges did not apply. However, there was no mention of inheritance tax in the report prepared by the financial advisors. Mrs Pitt applied for the discretionary trust to be set aside based on the rule and HMRC contested it.
The Supreme Court found for HMRC stating that where a fiduciary acts outside the scope of his or her powers, that act is void. Where a fiduciary acts within the scope of his or her powers but fails to take into account a relevant factor or takes into account an irrelevant factor, the act may be voidable but only if it amounts to a breach of his or her fiduciary duty.
In both cases, taking appropriate advice was not outside the scope of their powers so their actions were not void. Furthermore, acting upon the advice given meant they had discharged their duties of skill and care and was not a breach of duty so their actions were not voidable. The remedy to be sought would be a claim for damages for professional negligence.
In the case of Pitt, however, it was successfully argued that the court has an equitable jurisdiction to set aside a voluntary disposition on the grounds of mistake and Mrs Pitt’s appeal was allowed on this basis.
It is interesting to note that, in the light of recent tax avoidance schemes being brought to the public’s attention, the Supreme Court made reference to them in this appeal, with Lord Walker going as far as to refer to them as “a social evil”.
This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information.