Trustees - Court Refuses To Correct Tax Error
If trustees act in a way that gives rise to an unintended liability to tax, the situation can be put right by going to court to have the trust deed rectified. Traditionally, all the trustee had to do was to persuade the court that the unexpected tax liability was something which was important and which he had not considered. The court would then order the transaction to be set aside.
There is some evidence that the courts are taking a somewhat tougher stance nowadays when faced with claims for rectification of trust deeds, as a recent case shows. In it, the settlor of a trust created a discretionary trust for the benefit of his children. He did not realise that such a transfer is an immediately chargeable transfer for Inheritance Tax (IHT) purposes, thinking that it was a potentially exempt transfer. An application was made to have the trust deed rectified.
The judge refused, stating that there was no misapprehension about the effect of the trust deed, only its fiscal consequences. The deed as created reflected the settlor’s true intentions. The claim made by the trustees was to create a completely different settlement, not to rectify a mistake in the original settlement.
The Court of Appeal agreed – the settlor had wished to save IHT without giving gifts directly to his children. The trustees could not show the mistake in the deed that required rectification. They could only offer an alternative.
More recently, rectification has been refused in another case in which the only effect of the rectification requested would be that a fiscal advantage would be obtained. In that case the rights of the grantor of the trust and the intended beneficiary would have been completely unaffected by the proposed rectification.
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