A trust which attracted an unexpected tax bill of £156,000 for inheritance tax (IHT), has been set aside by the High Court on the grounds of equitable mistake.
The details of the case are that a father lent his daughter (the settlor) £530,000 to purchase a house whilst her existing property was on the market. This was on the grounds that both properties would be placed on trust, and the loan repaid when the first property was sold. The daughter agreed to this without taking any legal advice. The father had taken advice but his solicitor did not realise this would be a lifetime chargeable transfer for IHT purposes under the rules in the Finance Act 2006 (IHTA 1984, s 49 1A). As result of the tax liability, the daughter was unable to repay the amount her father had lent her to purchase the property.
Upon applying Ogilvie v Littleboy (1897) 13 TLR 399 and Pitt v Holt; Futter v Futter [2013] UKSC 26, the High Court Judge, Mrs Justice Proudman, found that the settlor had made a causative mistake that was sufficiently grave to make it unfair to leave the mistake uncorrected.
Joining in the proceedings, HMRC argued that the settlor had simply been ignorant of the tax consequences, which did not carry sufficient weight to enable a unilateral transaction to be rescinded. HMRC also argued that the tax consequences were not essential to the transaction, which had been made for asset protection reasons. The court rejected these arguments on the grounds that the IHT liability resulted in the trust having an entirely different effect from the one the daughter believed it to have. The liability also meant she was unable to repay the loan.
Mrs Justice Proudman said the claimant had “made a distinct and serious mistake. The settlement was not created for the benefit of the beneficiaries but to protect [her].
“She now has a large tax liability, which affects her ability to repay the loan, which she took on the basis that it would be repaid.
“Taking the matter in the round, it would be unconscionable for the donees [sic] to profit from that mistake and insist on their rights under the settlement.”
The relief would be granted, and the settlement would be set aside on the ground of equitable mistake.
