Kevin Read discusses how equity, rather than tax law, can decide tax cases.
The Supreme Court’s decision in Pitt v Holt [2013] UKSC 26 concerned the scope of ‘Hastings-Bass doctrine’. Broadly, this allows those acting in a fiduciary capacity to unwind arrangements into which they have entered, where there are unforeseen consequences.
The Supreme Court in Pitt v Holt confirmed that the Hastings-Bass doctrine could not apply where an appellant had (like Mrs Pitt) taken professional advice beforehand, as they had complied with their statutory duties as a fiduciary.
Unnecessary tax charges
Mrs Pitt had been acting under a power of attorney for her husband, who had been severely injured in an accident and received a large insurance payment. She had settled this on trust for him but had not created a ‘disabled person’s trust’, resulting in substantial unnecessary inheritance tax (IHT) charges.
The Court, though, also considered the equitable remedy of mistake, which allows a voluntary disposition to be set aside by the court where there has been a causative mistake so grave that it would be ‘unconscionable’ to refuse relief. The Court felt that her rather straightforward circumstances warranted this remedy (although it reached the opposite conclusion in Re Futter [2013] UKSC 26, where the mistake concerned how anti-avoidance rules affect UK beneficiaries of offshore trusts.
Mistake when encashing investment bonds
Pitt v Holt has since been cited in several other prominent tax cases. For example, Lobler v HMRC [2015] UKUT 152 concerned the partial encashment of offshore investment bonds, which are issued in segmented form. Mr Lobler ticked the box on the form for a partial encashment of all the segments, rather than opting to encash a certain number of whole segments. This produced a chargeable event gain of over £1 million, despite there having been barely any increase in value of the bond. Had he ticked a different box, the gain would have been negligible.
The Upper Tribunal referred to Pitt v Holt and allowed the appeal on the grounds of mistake. However, this remedy will be largely unnecessary for investment bonds in future, due to ITTOIA 2005, s 507A (introduced by F(No 2)A 2017, s 9). This allows a taxpayer to apply to HMRC for a review of the calculation of a chargeable event gain, on the grounds that it is wholly disproportionate to the economic gain.
Other cases referencing Pitt v Holt
In Hymanson v HMRC [2018] UKFTT 667 (TC), the appellant had claimed ‘fixed protection’ when the pensions lifetime allowance was cut. This allows a claimant to keep the higher allowance; but the protection is withdrawn if the investor has any further pension inputs whatsoever. He stopped contributions to his main pension scheme but failed to stop some minor direct debits into other pension schemes. The judge confirmed that HMRC had been correct to withdraw fixed protection but, as he felt that any appeal to the Upper Tribunal on the grounds of mistake would succeed, he allowed the appeal. The loss of fixed protection would have cost extra tax of around £50,000.
In Suckling v Furness and others [2020] EWHC 987 (Ch), the 80 year-old appellant, in what her solicitor had advised was a tax neutral transaction, established a life interest trust over business property, with herself as life tenant and remainder to her disabled children.
For capital gains tax purposes, this was a settlor-interested trust, so the gain arising on creation could not be deferred by holdover relief. Worse still, for IHT purposes there was an immediately chargeable transfer of value on creation of the trust, an IHT charge every 10 years and a gift with reservation of benefit, meaning that her share of the property would still be chargeable in her estate on death! The remedy of mistake was again granted.
Practical tip
If a ‘causative mistake’ has led to unconscionable tax charges and tax law does not provide a remedy, equity may do so.
