Nature of application
The application in Re Q was made by the Settlor of the Trusts for the Trusts themselves to be set aside and declared void ab initio on the grounds of his mistaken belief as to the tax consequences. The Settlor established the Trusts by settling nominal amounts (HK$10) into each Trust and subsequently transferring significant amounts (£20m in total) into them.
The Court indicated that the Court’s jurisdiction under the Trusts (Jersey) Law 1984 (“the Law”) was engaged in two ways in relation to such applications;
- Firstly, under Article 11 of the Law, the Trusts themselves could be declared invalid to the extent that it could be shown they were established by mistake; and
- Secondly, under Article 47E of the Law, the Court could declare subsequent transfers to an existing trust voidable where the transferor had made a mistake in relation to the transfers, would not have made the transfers but for the mistake, and where the mistake was of a sufficiently serious character.
On the facts, the Court indicated that it was satisfied that the Settlor had established the Trusts with nominal amounts for the purpose of making subsequent transfers, and that any mistake operated on the Settlor’s mind both in relation to the establishment of the Trusts and the subsequent transfers into them. On that basis, the Court felt able to proceed solely on the basis of Article 11 of the Law.
The mistake and awareness of risk
The Court found that the Settlor’s assumptions (as to domicile) amounted to him operating under a mistaken belief when he settled the Trusts, in two ways;
- He considered there was a risk that he might develop a UK domicile (rather than his Hong Kong domicile) at some later date. Instead, however, the actual risk was that HMRC would take the view that he had never lost his UK domicile. The Court observed that that was a completely different risk with the burden of proof upon the Settlor, and was therefore a much more serious and precarious risk;
- At the time of settling the Trusts, the Settlor’s belief was that any risk in relation to domicile was negligible whereas in fact the risk was high.
What is the position when the Settlor perceives some risk as to tax consequences? Can that operate as an operative mistake?
The Court observed that there had been no consideration under Jersey law as to whether an operative mistake could exist notwithstanding that the relevant person had been aware of some risk that his belief might be wrong. The Court indicated that the English law approach as to a mistake in relation to tax consequences (where a distinction was drawn between mistakes as to fact or law and as between effects or consequences) was;
“unnecessarily rule driven and artificial and in our view tends to obscure rather than illuminate the process which the Court must undertake”.
The Court further observed;
“It will always be a matter of fact and degree, whether a belief in relation to a risk is so far removed from a realistic assessment of that risk that it can be described as mistaken”.
The Court further acknowledged that there would be grey areas in some cases but held on the facts that the Settlor’s belief in relation to the risk of a domicile problem arising did amount to an operative mistake.
Certainty of tax advice
The Court further held that it did not need to determine whether the Settlor was definitely facing a tax liability in relation to his alleged domicile. It referred to A and B v C [2018] JRC 174A where the relevant tax advice was disputed;
“However whilst we do not feel able to say that the tax advice on which the Representors are now proceeding is necessarily a right, it is certainly not necessarily wrong either….The mistake made was not so much that there necessarily was a tax problem, but rather there was a probability that there was if the power were exercised in the way it was and…the Representors would not have exercised the power of appointment as they did but for that mistake”.
The Court concluded that if the Settlor had received advice at the time of establishing the Trusts as to the likelihood of HMRC alleging he had never lost his UK domicile, he would not have settled the Trusts, and was thus acting under an operative mistake.
Conclusion
Re Q thus provides some useful insight and guidance as to how the Courts will deal with mistake applications where the relevant person is aware of the existence of some risk as to, for example, adverse tax consequences. The case further provides a further degree of certainty as to the relationship between Articles 11 and 47E of the Law which is also welcome.
