In the Matter of Futter v Futter (UK High Court) [2010] EWHC 449 (Ch)

The Rule in Hastings-Bass survives a concerted attack from HMRC.

Mr Futter created a number of Settlements for the benefit of himself and his family. In relation to two of them, the No 3 and No. 5 Settlements, there were relatively significant stockpiled gains. After some discussion, it was resolved that a distribution would be made from those Settlements, in accordance with powers of advancement given to the trustee. It was anticipated those distributions could be offset against losses on Mr Futter’s personal portfolio. That was a mistake, as the advisers failed to take into account s. 2(4) of the Taxation of Capital Gains Act 1992, which specifically provides that allowable losses cannot be set off against the relevant attributable gains.

The trustee therefore sought a declaration that the advancements were void and of no effect, based on the Rule in Hastings-Bass which (put briefly) enables the court to intervene where a trustee exercises a discretion but the effect is different from that which the trustee intended.

HMRC did not seek to challenge the evidence as to what the advice had been, nor as to the intention and expectation of the trustee and Mr Futter. However Counsel for HMRC argued that the Rule had been taken to ‘absurd lengths’ and challenged the application on three grounds:

1.   The effect was not different to that intended, merely the tax consequence. A distribution was intended, and was made.

The Court rejected that argument as there was ample authority that the Courts did not draw such a distinction between ‘effect’ and ‘consequences’.

2.   The decision had to be ‘objectively significant’.

The Court accepted that the significance was relevant, but would be considered as part of the necessity to demonstrate that had the trustee known the true position, it would not have acted as it did.

3.   Counsel tried to draw a distinction between trustees failing to take into account a factor (the tax advice) with a trustee who, as in this case, did take into account the tax advice; but incorrect tax advice.

However, following earlier authorities, the Court disagreed – the relevant failure is the failure to take into account a particular factor – in this case, the true tax liability.

Comment

The Rule in Hasting-Bass is alive and kicking, and continues to offer assistance to trustees. This despite the words of Mr Justice Norris who summed up the background to Futter somewhat caustically; ’the trustees wish to assert that they have acted in an untrustee-like fashion and so have failed properly to exercise a power vested in them’ and ‘wish to take advantage of this failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability’ resulting from the decision.

There has been much comment as to whether the Rule has been extended too far. There is little doubt that the Court in Hastings-Bass, giving judgment which offered a ‘stout shield’ against attack from the Inland Revenue (as was) can hardly have intended that their decision would become such a powerful sword in the hands of a trustee. When HMRC announced in its Tax Bulletin 83 in July 2006 that it would henceforth play a more active role to ‘assist’ in such applications, there was no doubt as to which direction such assistance might point, and  it might have been expected that a retrenchment of the principle would follow.

To date this has not proved to be the case. In Jersey, in In the matter of Seaton Trustees Limited [2009]JRC050,  Commissioner Clyde-Smith, on noting that HMRC had written to the Court with a number of arguments as to why an application by the trustee should not be granted, stated the following;

‘Before commenting on the points raised by HMRC, we should make it clear that whilst we can appreciate the courtesy extended by [the trustee] to HMRC [in notifying them of the application], the latter has no interest in the application (only in the UK tax consequences that may flow from it) and therefore no locus standi upon which to seek to intervene.

Now in Futter, the High Court has heard detailed argument for HMRC and still declined to limit the Rule. It remains to be seen whether the Court of Appeal might yet do so – it is notable that Mr Justice Norris made repeated reference to the fact that he was sitting as a judge of first instance, applying well established principles.