Trusts

Appointment by trustees contrary to opinion of counsel - charge to capital gains tax incurred - tax planning a relevant consideration for trustees - appointment invalidAbacus Trust Company (Isle of Man) Ltd and Another v National Society for the Prevention of Cruelty to Children: ChD (Mr Justice Patten): 17 July 2001The beneficiaries of a trust fund, of which the claimants were the trustee and protector respectively, were facing a substantial charge to capital gains tax (CGT) on the maturation of a loan note it had received from a company in consideration for the trust's controlling stake in another company.The claimants sought the advice of leading counsel, as a result of which a scheme was devised to reduce the beneficiaries' liability, which involved making an appointment in favour of the defendant charity.Contrary to the advice of leading counsel the deed of appointment was duly executed on 3 April 1998 when in order for the scheme to be effective the appointment had to be deferred until 6 April 1998 (the beginning of a new tax year).The claimants applied to the court for a declaration that the deed of appointment was void ab initio by reason of the claimants through their directors, having failed when considering whether to execute the deed, to take into account a relevant consideration, namely the liability to CGT incurred by the settlor as a result of the timing of the appointment.Nicholas Warren QC (instructed by Charles Russell) for the claimants.

Thomas Dumont (instructed by Hempsons) for the defendant.

The Inland Revenue Commissioners did not appear and were not represented.Held, allowing the application, that had the trustees applied their minds to the advice of leading counsel at the relevant time the deed would not have been executed on that day; that the court therefore had to consider whether the appointment should be set aside in accordance with the rule in In re Hastings-Bass (dec'd) [1975] Ch 25, that is to say where the trustee would not have acted as he did had he not taken into account considerations which he should not have taken into account, or had he not failed to take into account considerations which he ought to have taken into account; that the factors which may vitiate the exercise of this power were not limited to the legal effect or consequences of the power in question; that it was unrealistic to divorce that appointment from the earlier steps in the tax saving scheme since other appointments made on 1 April and the exclusion of the settlor's family on 3 April were made so as to avoid a charge to CGT to the detriment of the settlor; that while the trustees were not making any appointment in favour of the settlor as such, they were nonetheless obliged to ensure that in making the disposition they did not nullify the fiscal effect of the earlier dispositions made at a time when they undoubtedly did owe a fiduciary duty to the settlor; that the fiscal consequences of the appointment were a relevant consideration for them to take into account when exercising their power in favour of the defendant; that there was no disadvantage for the defendant in not making the appointment until after 6 April, and every advantage in so doing; and that any failure to take those matters into account must vitiate the exercise of the power unless it was clear that on a proper consideration of all relevant matters the decision would still have been the same.