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Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Capital Tax Review, warns of a potential nightmare scenario on the retirement and appointment of trustees.

Context

The issue in this case was whether for purposes of Trustee Act 1925 s37(1)(c) a trustee would be properly discharged, on the basis that a company was an ‘individual’.

Jasmine Trustees Ltd and Others v Wells & Hind (a Firm) and Another: the facts

The family settlement was constituted by Major-General and Mrs Coaker, both of whom were resident in the UK. In 1982 the Coakers purported to resign and appointed the Investment Bank of Ireland (IOM) Ltd and a Mr Thornton, both of whom were resident overseas, to be sole trustees.

Thereafter, the purported trustees appointed replacement trustees, all of whom were resident overseas, who made resolutions and declarations on the footing that they had been validly appointed. The defendant firms had acted in the drawing up of various documents during the relevant period.

A remedial appointment of the first and second claimants, both trust corporations, was made in 2002 because of concerns over the effectiveness of the 1982 deed of appointment.

Subsequently, the Inland Revenue raised Capital Gains Tax (CGT) assessments against the first and second claimants for each of the years 1989 to 1997 on the basis that the majority of the trustees were resident in the UK.

Those assessments were raised under the 1979 Act and the 1992 Act, which were relevant to different periods of the life of the trust.

By virtue of s 52 of the 1979 Act and s 69 of the 1992 Act, the wording of which was the same: ‘the trustees of the settlement shall be treated as being resident and ordinarily resident in the United Kingdom’.

The claimants brought proceedings against the defendant firms on the basis of professional negligence for damages in the amount of tax due.

The decision (ChD: Mann J)

A company was not an ‘individual’ in the context of section 37(1)(c) of the Trustee Act 1925, which provided that a trustee would not be discharged from his duties unless there was either a trust corporation or at least two individuals to take over the trust, since ‘individual’ meant ‘natural person’. 

Mann J said that, since the original trustees purportedly appointed a company and an individual, instead of two individuals or a trust corporation, the original trustees had not been discharged from their duties.

Therefore: (i) the trustees of the settlement were ordinarily resident in the UK, so that the trust was onshore for tax purposes; (ii) various trustees purportedly appointed during the relevant years were not ‘trustees of the settlement’ under CGTA 1979 s 52 and TCGA 1992 s 69; and (iii) various resolutions made during the life of the trust were invalid and ineffective.

(Jasmine Trustees Ltd and Others v Wells & Hind (a Firm) and Another 19.1.07 The Times Law Reports 12.2.07)

Comment

There could be very worrying implications of this decision, even in an all UK situation, if the old trustees had not been properly discharged and so, on the basis of Trustee Act 1925 s 37(1)(c), the new trustees are not even constructive trustees.  This would mean that any CGT paid over what could be quite a long period of time had not been paid by the ‘proper’ trustees (even if by concession HMRC were prepared to allow set off against the proper trustees’ liability), with failures as to self assessment etc.

This could arise if for example (a) the wrong power was used in a power of appointment; (b) the written consent of the settlor or protector was required and had not been obtained, either at all or in the prescribed manner; or (c) the old trustees had become non-UK resident after ‘retiring’, but then found that they were still trustees and that emigration had inadvertently triggered an exit charge.

Any distributions of capital made by the new improperly appointed trustees would be invalid – and so on.  Something of a nightmare scenario…

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, click here. 

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