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Supreme Court rules on significant trust cases

13th May 2013
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Trustees can only unwind mistakes that result in more tax being paid than expected if the trustee acted in breach of trust, the Supreme Court has ruled.

Tax experts said the judgement is one of the most significant UK trusts law cases in many years and could have a big effect on family trusts and pension schemes.

The Supreme Court’s judgement on the two cases – Futter and Another v HMRC and Pitt and Another v HMRC, [2013] UKSC 26 – confirmed a previous ruling by the Court of Appeal.

The cases, both of which are complicated and involve various legal precedents, are summarised by law firm Maurice Turnor Gardner (MTG).

In Pitt v. Holt, Mrs Pitt was the widow and personal representative of Mr Pitt, and was his receiver appointed by the Court of Protection. Mrs Pitt had set up a trust  to hold a damages award for her husband who had been injured in a road traffic accident in 1990.

The transfer of the damages award to the trust had unintended consequences and inheritance tax was due. The tax bill could have largely been avoided if has the trust been drafted correctly. 

In Futter v. Futter, trustees of an offshore trust made payments to UK resident beneficiaries, having been advised that the CGT liabilities that would normally arise, as there were stockpiled gains in the trust, could be offset against the beneficiaries' personal losses. This was not the case.

In both cases, the appellants tried to argue that their actions were made in error, and that they should therefore be reversed.

“Today's judgment confirms the position that a trustee's mistake can only be rectified if the trustee acted in breach of trust, for example, by failing to take relevant circumstances into account,” MTG said.

“If trustees act reasonably in taking advice on particular consequences of a proposed course of action (e.g., the UK tax consequences) then they are unlikely to be in breach of their fiduciary duties in relation to those consequences - even if the advice turns out to be inaccurate.”

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