Court corrects costly tax error in family’s trust fund

By Claire Wilson Associate Solicitor

The High Court has allowed a family to correct an error in a trust fund that would have had costly tax implications.

The case arose out of financial arrangements outlined in the will of a man who died in 2015.

He bequeathed £4.2m to be held on trust for the benefit of his widow and his children, with a class of discretionary beneficiaries comprising of other family members.

The widow had a life interest in the income of the fund and the trustees had power to pay or apply the whole or part of the capital for her benefit.

After making some payments to family members, the trustees then executed a deed of appointment terminating the widow’s life interest in the legacy fund and holding it on discretionary trusts for the discretionary beneficiaries.  That was done following advice that there would be no inheritance tax implications.

However, the appointment was immediately chargeable to inheritance tax at a rate of 20%.

When the trustees discovered that the advice about the tax consequences had been wrong, they asked the court to rescind the deed of appointment on the basis that they would not have entered into it had they been properly advised.

The High Court granted their application. It held that such an application could be refused where the objective was tax avoidance, but this was a case where the trustees had been given wrong advice.  They had simply been looking to end the widow’s interest in possession on the basis that there would be no adverse tax consequences.

The tax liability was likely to disadvantage the discretionary beneficiaries by reducing the size of the fund.  The trustees had given assurances as to the future exercise of their powers.  There was no opposition from the beneficiaries. In the circumstances there was a mistake which justified rescission.

Please contact us if you would like more information about the issues raised in this article or any aspect of wills, trusts and inheritance on 01228 514077 or click here to email Claire direct.

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Excellent advice given. Pleasant, courteous staff.

Client 28th May 2015