Transfer into Guernsey trusts set aside on grounds of mistake despite the fact the transfer was made solely to reduce tax

The Guernsey Royal Court recently ordered, under s. 69(1)(a)(iv) of the Trusts (Guernsey) Law 2007 (the "Act"), that a transfer of shares into Guernsey trusts be set aside on grounds of mistake. This was despite the fact that the transfer had been made for the sole reason of reducing tax liability. We consider the case, Whittaker v Concept Fiduciaries Ltd, further below.

In 2008, the applicant received tax advice to the effect that if she transferred her shares in Slimming World companies, which were incorporated in England & Wales, into Guernsey trusts, this would mitigate her and her estate's tax liabilities, while enabling her and her children to continue to receive the capital and income tax-free until her death. On the basis of this advice, she transferred her shares into Guernsey remuneration trusts and sub-trusts, which were administered in Guernsey and had a Guernsey-resident trustee. When she changed tax adviser, she discovered that the transfers did not have the promised tax effects; furthermore, they carried the serious risk that she and her family would not be able to benefit from the settled shares' capital. She applied to the Royal Court in Guernsey under s. 69(1)(a)(iv) of the Act (which grants wide powers on the court to make an order in respect of trust property) to have the transfer set aside on grounds of mistake.

The court considered that English law was the applicable law because the shares that were the trust property were located in England and Wales as that is where the companies' share registers were situated. It applied the equitable doctrine of mistake articulated by Lord Walker in the Supreme Court case of Pitt v Holt [2013] UKSC 26: for a voluntary disposition to be set aside, there must be a mistake, which caused the disposition, that is so grave that it would be unconscionable not to set it aside. The gravity, according to Lord Walker, is to be assessed based on a close examination of the facts, including any tax consequences of the disposition for the disponor. Lord Walker commented negatively on tax avoidance.

The Royal Court noted that there was nothing "intrinsically artificial about the remuneration trust arrangements": there was a genuine trust, with a genuine trustee, of the sort that many other similar businesses use. Furthermore, the settlor would not have made the settlement but for the tax advice, which contained serious mistakes. For these reasons, it held, the transfer should be set aside on grounds of mistake.