Representation of Dominion Fiduciary Trust Limited re the E Trust: [2024] JRC 168

The Court heard representations on 14 December 2023 regarding a Jersey discretionary trust created in 2016. The beneficiaries included the Settlor, his spouse, and their four children. The Trust owned significant assets, including two London properties purchased for £54.5 million in 2016.

The Trust was initially set up by the Settlor for asset protection and to circumvent the forced heirship regime in the Settlor’s home country. The Settlor wanted the Trust to be tax-efficient. The properties were held by two Jersey companies acting as nominees for the Trustee.

Hogan Lovells provided tax advice in 2016, which led to the Trust’s current structure. The advice aimed to reduce UK inheritance tax (IHT) but had several deficiencies.  Specifically, it wrongly suggested refinancing the properties every three years to maintain a high mortgage ratio for IHT efficiency.  The Trustee subsequently sought to set aside the establishment of the Trust claiming the initial advice was mistaken.

Mr. Mullan KC, an expert in English tax law, criticised Hogan Lovells’ advice as being  inadequate and not tax-efficient. He recommended that the properties should have been held directly by the Settlor or via a company acting as nominee for him, rather than through the Trust, which incurs unnecessary tax liabilities. The Trustee requested that the Court set aside the Declaration of Trust to reflect this advice.

The Court expressed concern about the impact of the relief sought on the beneficiaries, particularly the minor children. Affidavits from the Settlor and his wife were not initially provided to support the application and the Court ordered that they were required to clarify their positions and confirm the impact on family wealth preservation. Additionally, the Court noted that HMRC were not notified of this application and subsequently ordered that they be notified due to the tax implications of the application.

The Court also raised concerns about the Settlor’s absence from the hearing and the lack of response from affected third parties, such as the bank involved in the lending facility (where relief was sought to replace the Settlor as a guarantor of a loan instead of the Trustee).

The Court emphasised that the goal of an application under Article 47E of the Trusts (Jersey) Law 1984 was not to rewrite history but to determine the appropriateness of setting aside the original trust structure due to the alleged mistake.

The Court ultimately concluded that the statutory test under Article 47E was met because in reliance upon tax advice received in 2016 prior to the establishment of the Trust, the Settlor and the Trustee received advice that was inadequate and / or incorrect in that it:

• did not address the application of the gift with the reservation of benefit rules leading to the assumption that the properties would not form part of the Settlor’s estate on death. Further the advice did not consider either the inheritance tax or capital gains tax consequences of the Settlor’s death;
• was at best incomplete on the application of Section 162A of the Inheritance Tax Act;
• was at best incomplete as to what might occur if the Settlor became a UK resident and did not address that there would be a charge on the benefit of the occupation of the properties in those circumstances;
• failed to recommend a more efficient structure, namely for the Settlor to hold the properties directly, albeit subject to the mortgage and its replacement mortgage, which would have avoided the ten year charges and / or exit charges, retained the benefit of the inheritance tax spouse exemption with the benefit of a capital gains tax free uplift in the value of the properties and no inheritance tax exit charge, and would avoid the gift with reservation of benefit concerns and consequences on the Settlor’s death.

The Court was satisfied that but for this advice, the Settlor and Trustee would not have entered into this transaction. The mistakes were of a serious character and, in its view, it is and was just for the Court to make the declarations sought.

KEY WORDS:  Trusts; Mistake; Tax; Inheritance Tax

A recent judgment concerning the Court’s powers under Article 47E of the Trusts (Jersey) Law 1984. The principles that the Court applies when hearing these applications is well established, however this judgment emphasises the importance of ensuring that all relevant evidence is presented to the Court at the outset.