Justin McGilloway
- Partner
- Pensions & Employee Benefits
Background
In 2005, Janus Henderson, the asset management group (formerly the Henderson Group) established an employee benefit trust to benefit employees and their families, and an employer-financed retirement benefit scheme in 2011 (established in anticipation of legislative changes), to benefit employees and former employees (the “Trusts”).
The Trusts were drafted to fall within section 86 of the Inheritance Tax Act 1984 (the “1984 Act”) and therefore fall outside of the relevant property regime and not be subject to inheritance tax (“IHT”) ten-year charges and exit charges.
Funds were subsequently appointed on revocable sub[1]trusts to specific beneficiaries on the understanding that this would not affect the IHT position. However, this was not actually the case as HMRC’s view was that sub-trusts for specific beneficiaries do not satisfy section 86, as those assets are not held for the benefit of all or most employees at that time. There would therefore be a significant IHT liability – approximately £7 million.
Recission
The trustee of the Trusts and group companies applied to set aside the appointments onto sub-trusts on the ground of mistake. The defendants, who are beneficiaries of the Trusts, did not oppose the relief sought by the claimants and were willing to be appointed as representative beneficiaries.
The right in equity to rescind is the right of a party to set aside a transaction and to be restored to their former position. It is a remedy for misrepresentation or for common/mutual mistake. However, it will not be available if one of the bars to recission is present. However, the High Court judge in the case concluded that the hurdles for recission had been passed as:
- the appointments were made on the basis of an operative mistake as to the fiscal effect of those deeds (i.e. the understanding was that the Trusts would continue to benefit from the treatment in section 86 of the 1984 Act – the trustees argued that they had not appreciated any risk that the introduction of the sub-trusts would take the Trusts outside the protection of section 86);
- the mistake was sufficiently serious so as to render it unconscionable for the mistake to be left uncorrected;
- the creation of the sub-trusts would lead to a significant amount of tax becoming payable; and
- serious issues as to who would pay such tax in circumstances where the trustees of the Trust do not have sufficient assets.
HMRC’s position
As there was a potential loss of tax, the usual practice in such cases was either for HMRC to become a party to the case, or for it to write to the court and ask “for a small number of well known authorities to be drawn to the attention of the court.” HMRC declined to become a party and sent a letter to the court. The letter set out several potential objections to recession noting in particular that the sub-trusts are “complex tax planning” which did not comply with the conditions for IHT relief, and the difference in tax treatment arising from the appointments should not necessarily mean it was unconscionable for the court to refuse recession.
High Court criticism of HMRC
In granting recission, the High Court was critical of HMRC’s letter, which was filed “at the eleventh hour” shortly before the hearing, as it “goes well beyond the sort of points which may properly be made only in correspondence and without seeking to be joined to the proceedings.”
Specifically, if HMRC wished to rely on prejudice to taxpayers generally as a ground for the refusal of recission, it was of paramount importance that it should join as a party to the proceedings and file evidence explaining its position. HMRC’s approach was described as “shadow boxing through correspondence” and was deemed inappropriate.
Furthermore, the court noted that HMRC seemed to accept that, if not for the sub-trusts, the arrangements would fall within section 86, and that “complex” is not synonymous with “artificial” tax avoidance. The court held that the sub-trusts were made on the basis of a mistake as to their tax consequences.
Wedlake Bell Comment
This is a landmark decision in trust law and tax planning. It demonstrates the complexities involved in managing employee benefit trusts and the potential for significant tax liabilities if mistakes are made. It underscores the importance of considering recission as a remedy when tax planning goes wrong.
The case serves as a reminder that trustees must be vigilant in understanding the tax implications of their actions and the potential for recession to eliminate tax liability at source.
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