The test for mistake when creating a trust has been clarified by the Royal Court of Jersey
10 March 2014
On 4 March 2014, the Royal Court gave judgment in Boyd v. Rozel Channel Islands Limited and Others  JRC056
The facts were that the applicant, Mr Boyd, for whom Advocate Rob Gardner of Bedell Cristin acted, was resident and domiciled in England until March 1997 and thereafter became resident and domiciled in the Isle of Man. Shortly afterwards, he sold his commercial business and sought appropriate advice as to how to deal with the shares in a Jersey company that held the proceeds of sale so as to satisfy his wishes and to ensure the arrangement was tax efficient. He consulted UK and Jersey accountants and a Jersey trust company.
In October 1997, and relying upon advice, Mr Boyd, as settlor, settled the shares of the Jersey company into a discretionary trust. It had Jersey trustees and was subject to Jersey law. The settlor and his wife were beneficiaries with long stop trusts in favour of charities generally. The trust continued for more than 10 years until it became apparent to the UK accountants that the effect of the deemed domicile rule had been overlooked. The result was that under UK tax law:
- the initial or subsequent transfer to the trust gave rise to a tax charge of 20% of the capital value;
- 10 year charges, amounting to about 6% of the capital value, were levied on each 10th anniversary;
- There would be an exit charge when the trust was wound up;
- the settled property would be treated as part of the settlor's estate on his death and subject to inheritance tax;
- there would be interest and penalties to pay.
The result would be that approximately one quarter of the £4 million value of the trust would be subject to tax which otherwise would not have arisen had the trust never been created, or had it been created, after over 3 years had elapsed from the date Mr Boyd had acquired the new domicile, by which time the deemed domicile provision would not have applied to him.
The application was made under Article 11 of the Trusts (Jersey) Law 1984 dealing with invalidity of a trust for equitable mistake. Alternatively, and for the first time, the application was based on mistake pursuant to the provisions of the recent Trusts (Amendment No. 6) (Jersey) Law 2013 which set out a statutory test for Hastings Bass and equitable mistake applications.
The Court held that Article 11 of the Trusts (Jersey) Law 1984, together with the earlier common law position on mistake, could be applied to the facts of the case. This resulted in a finding that the three requirements had been met, namely:
- there had been a mistake on the part of the settlor;
- the settlor would not have entered into the transaction "but for" the mistake;
- the mistake was of so serious a character as to render it unjust on the part of the donee to retain the property.
This then resulted in the Court declaring that the trust should be set aside on the grounds of mistake and to have been invalid under Article 11. The trust having been avoided, it is as if it never existed.
There was therefore no need to consider the later statutory amendments.
The trustees, which had supported the application, were permitted to retain all remuneration and expenses and to charge its reasonable and proper costs incurred in the application.
HMRC had been given notice of the application but did not take part.