Elysium Law have received enquiries from taxpayers who have received large CGT assessments from HMRC which have been raised as a result of the Trust document used by Property 118 and Cotswold Barristers.
HMRC’s position is that incorporation relief provided by Section 162 of the Taxation of Chargeable Gains Act 1992 is not available as a result of a clause used in the purported Deed of Trust which creates a power of revocation, allowing the Trustees to vest the property in themselves absolutely and bring the trust to an end. HMRC’s position is that this future right to receive the property creates a separate contingent beneficial interest, which is not transferred to the company. As a consequence, the whole of the assets of the business are not transferred to the company and the relief is not available.
As a result, landlords that have implemented Property 118 or and Cotswold Barrister are facing significant and unintended tax consequences.
This will potentially give rise to a claim in professional negligence, but the losses must be mitigated. One option available is an application to the Court to set aside the arrangements on the grounds of mistake.
Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you
In Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 53 (Bhaur) the Court of Appeal provided helpful guidance on when a court will set aside a transaction and unwind adverse tax consequences. In summary, this was a tax avoidance scheme using the (abusive) EBT arrangements, to avoid IHT which the court refused to unwind. In this case the presentation of the trust to HMRC was dishonest and was tantamount to tax evasion.
Having lost in the High Court, the Appellants first ground of appeal was that the Judge should have allowed the transaction to be unwound in that the Appellants belief that they would incur no tax consequences was not a misprediction, but a mistake.
The first instance Judgment contains an extended analysis of the law on the setting aside of voluntary dispositions for mistake. The leading authority in the area is the decision of the Supreme Court in Pitt v Holt [2013] 2 AC 108.
In Pitt v Holt, at [103], Lord Walker adopted, the approach of Lloyd LJ in the Court of Appeal ([2011] EWCA Civ 197 at [210]-[211]), setting down three principles which would lay the groundwork for the exercise of the equitable jurisdiction to set aside a voluntary disposition , namely;
- A mistake, which is;
- Of the relevant type; and
- Is sufficiently serious so as to render it unjust or unconscionable on the part of the donee to retain the property given to him.
Misprediction or Mistake – the difference
Misprediction
In Pitt v Holt the Court said a misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law.
In Dextra Bank & Trust v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193 at [29], the court said “… to act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …”
Mistake
This is a different consideration. The courts and lawyers generally deal with mistakes as to the consequences of a transaction.
For many years, a distinction was drawn between a mistake as to the effect of a transaction and its consequences. However, the modern approach is that providing the court is satisfied that there is a causative mistake of sufficient gravity; and as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.
The gravity of the causative mistake is relevant to an assessment of injustice or unconscionability. The court said that the injustice (or unconscionability) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an “intense focus” on the facts of the case including the circumstances of the mistake and its consequences for the person who made the disposition.
An evaluation – what are the merits of the case?
The court will look at the surrounding circumstances and the (in) justice done to the person making the disposition. The doctrine of mistake applies to unintended tax consequences. In Pitt, the court rejected any suggestion that mistake could not apply to tax issues. However, the court added the following when referring to previous cases and in particular Futter v Futter where the doctrine of mistake was not raised by the (Plaintiff). Lord Walker in Pitt said;
“Had mistake been raised in Futter v Futter there would have been an issue of some importance as to whether the court should assist in extricating claimants from a tax avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no means at the extreme of artificiality (compare for instance, that in Abacus Trust Co (Isle of Man) v NSPCC [2001] STC 1344) but it was hardly an exercise in good citizenship. In some cases of artificial tax avoidance, the court might think it right to refuse relief…”
Why you need advice on the scheme
Lawyers and students alike will recognise the maxim ‘He who seeks Equity must do Equity’, but effectively any refusal now is based on public policy consideration. An example of this can be found in the case Dukeries Healthcare Limited v Bay Trust International Limited [2021] EWHC 2086 (Ch), with Deputy Master Marsh holding that, whilst the doctrine of mistake applied, it was refused nevertheless on the grounds that the whole transaction amounted to an artificial tax avoidance scheme.
Anyone affected needs independent advice, considering the degree of risk and any artificiality of the scheme, given that unintended tax consequences are an issue. This should be advised upon by an independent law firm such as Elysium Law and will involve review of the documentation, any advice provided to the Claimant at the time and what it was that was that the Claimant hoped would be achieved.
Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you.
Elysium Law has been approached to consider bringing such a claim.
For further advice please contact us at Elysium-law