The English Court of Appeal re-examines the rule in Hastings-Bass and Mistake

On 9 March 2011, the English Court of Appeal issued its eagerly anticipated judgment in Pitt v Holt and Futter v Futter.

The English Court of Appeal had to consider two questions.
(1) In what circumstances the court may set aside the exercise by trustees of a discretionary dispositive power (known as the rule in Hastings-Bass)?
(2) What is 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?

The Facts - Pitt v Holt

Mr Pitt was seriously injured in a road accident and received a lump sum and an annuity by way of settlement of a personal injury claim.

His wife, Mrs Pitt, was appointed by the Court of Protection as his receiver. With the benefit of professional advice, Mrs Pitt settled the lump sum into a discretionary trust and assigned the annuity into the same trust. The settlement resulted in an immediate inheritance tax (IHT) charge on the whole value of the lump sum. An IHT charge would arise on any distributions of capital being made out of the settlement and the entire trust fund would attract a 10 year IHT charge. Although professional advice had been taken, the trust could easily have been established in a way which would have avoided these tax consequences.

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