Backing away from a mistake

In December 2024, the High Court delivered a significant judgment in the case of JTC Employer Solutions Trustee Limited v Garnett and another [2024] EWHC 3128 (Ch), permitting the rescission of various deeds of appointment on the basis that a mistake had been made as to the fiscal effect of those deeds. 

The judgment saved the claimants from around £7m of (what had been unexpected) inheritance tax.

The case provides a valuable reminder as to the law of mistake and the possibility of turning to the Courts to avoid unexpected adverse tax consequences in certain circumstances.

The mistake

The case involved two main trusts:

1. a Family Benefit Trust (HFBT) which was established in 2005 for the purpose of holding assets for the benefit of certain individuals and their families; and
2. a discretionary Employer Financed Retirement Scheme (EFRBS) which was established in 2011 and designed to provide benefits to employees and former employees.

Various deeds of appointment had been executed pursuant to the trusts, which created sub-trusts for individual beneficiaries. 

The core issue was the mistaken belief held by the claimants that the sub-trusts would continue to benefit from favourable tax treatment under section 86 of the Inheritance Tax Act 1984. 

Broadly speaking, where a trust qualifies under section 86, the settled property is not relevant property for inheritance tax purposes, and so it excluded from the charges that would otherwise apply. However, in order to qualify under section 86, the settled property needs to be applied for the benefit of “all or most” of the employees.

In this case, HMRC contended that, by creating sub-trusts for the benefit of individual beneficiaries and families, as opposed to the wider class of employees, protection from the relevant property trust charges had been lost.

The claimants therefore sought recission of the deeds of appointment, on the basis that no-one involved with the creation or administration of the trusts considered that there was any risk that the exemption at section 86 would not apply to the assets within the trusts, including the sub-trusts.

Key considerations

The case provides a helpful reminder as to the test for rescission and the key principles set out in the case of Kennedy v Kennedy [2014] EWHC 4129 (Ch):

1. Existence of a mistake – the Court must determine whether there was a distinct mistake, as opposed to mere ignorance or inadvertence leading to a “misprediction”. A mistake involves a false belief or assumption about a fundamental aspect of the transaction. 
2. Carelessness does not preclude a mistake – a mistake may still be a relevant mistake even if it was due to carelessness, unless the circumstances show the risk should be considered to have been taken deliberately.
3. Gravity of the mistake – the mistake must be sufficiently grave to make it unconscionable for the done to retain the property. This test is normally satisfied only when there is a mistake a to the legal character or nature of a transaction or some matter of fact or law which is basic to the transaction
4. Injustice – the injustice, unfairness or unconscionableness of leaving a mistaken disposition uncorrected must be evaluated objectively but with an intense focus on the facts. 

The High Court's decision

Applying these tests, the Court held that:

1. It was entitled to proceed for the purposes of the rescission claim on the footing that HMRC were correct to contend that section 86 was not satisfied by the sub-trusts.
2. If the mistake were left uncorrected, there would be a potential tax liability of approximately £7 million, with the claimant having retained an insufficient sum with which to meet that liability. This was considered sufficiently serious to render it unconscionable for the mistaken dispositions to be left uncorrected.
3. The assumed application of section 86 was basic to the transaction.
4. The trusts could have been managed lawfully without the sub-trust appointments, and there was no reason why justice or fairness would require the superfluous appointments to remain in place.
5. The trusts in question were mainstream and not seen as an aggressive form of tax planning. HMRC accepted that the trusts would have benefited from section 86 were it not for the sub-trust appointments, suggesting that the overall scheme was not artificial or abusive. Therefore, there were no public policy grounds to deny relief.
6. There is no general principle that the Court should not intervene where the mistake has been as to tax effects.

For these reasons, the Court was satisfied that the various deeds of appointment made under the HFBT and EFRBS should be set aside.

Implications of the judgment – why does it matter?

The case is an important reminder of the Court’s power to rectify certain mistakes – even where the mistake is as to tax. This presents a significant opportunity to any taxpayer facing an unexpected tax liability as a result of a genuine mistake.