Illustrating clearly that UK and Isle of Man law are not necessarily one and the same, on 30 June 2016 Deemster Doyle delivered judgment in a trusts case that explicitly recognises the potential for differences in approach and outcome between the two legal systems. Significantly, the judgment has substantial implications for professional trustees in the Isle of Man and potentially further afield, as well as for those who advise them.
Overview of the case
The case in question concerned two parties: the Defendant trustee, CD, and the Claimant, AB. In 2012 the Defendant granted a number of call options over trust assets, ultimately in favour of the Claimant, who had that year become a UK resident. It then transpired that the call options had potential adverse UK CGT consequences for the Claimant, which could have been avoided by putting in place appropriate nominee agreements, however this was not identified.
The Claimant (AB) applied to set aside the call options on the grounds of the principle in Hastings-Bass, being the principle that the Court may set aside actions taken by trustees that have unintended consequences, and on the grounds of equitable mistake. Interestingly, this is the first decision in the Isle of Man courts on the Hastings-Bass principle, thus accepting that the principle forms part of Isle of Man law, and on the law relating to relief for equitable mistake following its reformulation by the UK Supreme Court in Pitt v Holt , which was commented on extensively.
The Court found that the Defendant was alive to the need to consider any adverse tax implications in the jurisdictions where the Claimant was resident, but the Defendant did not obtain UK advice and the call options were granted without the benefit of such advice. Had advice been sought, such that the Defendant became aware of the potential adverse UK tax consequences, it was decided that the Defendant would not have granted the options.
It was argued by the defence that the obligation to obtain tax advice was dependent on circumstances, and that in this case the trustee had acted reasonably.
The Court was unpersuaded and set aside the call options, declaring them void.
What does this mean for trustees?
The main practical implication emerging from the case is that the onus of ensuring tax advice on the consequences of trustee decisions is accessed and considered, lies with the trustee. If this responsibility is neglected, the trustee could find itself in breach of duty.
It may be that the Court is setting a higher threshold than a “reasonableness” test, placing a responsibility on the trustee to positively ensure that the tax consequences of trustee decisions in all relevant jurisdictions are considered as part of the decision-making process.
What does this mean for Practitioners and trustees day-to day?
The safest approach going forward for trustees asked to exercise discretion is to ensure advice from tax advisors obtained by the trustee before making decisions. Of course this approach may give rise to additional costs, and commercially there may be a balance to be struck; there may be less costly solutions which provide an acceptable degree of protection.
Isle of Man steps away from English case law
The judgment in AB v CD is also of considerable interest thanks to comments made on the judgment of Lord Walker in Pitt v Holt. Lord Walker had said, in relation to equitable mistake, that in some cases of artificial tax avoidance the Court might think it right to refuse relief on the grounds of public policy, referring to the increasing condemnation of artificial tax avoidance. Deemster Doyle viewed this as a “UK policy kite”, and the judgment indicates that the Isle of Man courts might not be inclined to share Lord Walker’s views in this respect.
Rejecting Lord Walker’s remark that certain offshore trustees may see their duty as “unquestioning obedience to the settlor’s wishes”, Deemster Doyle observed that such comments do not reflect the modern offshore trust environment in the Isle of Man.
Of Pitt v Holt, the Deemster said that no assumption that Manx law would automatically follow English law should be made, especially in respect of a decision largely driven by UK policy and UK tax revenue considerations. He noted that English precedent is not binding on the Manx courts, and that there may be differences between Isle of Man and UK public policy.
A final point of interest in the case is the wide ranging order made by the Court to protect the identity of the settlor, the trustee and the beneficiaries. Although supporting the requirement for open justice, the Court judged confidentiality appropriate in this case, given the relevance of privacy concerns where private family trusts are involved.
The fastest legal system in the world?
What is exceptionally clear from this judgment is that the Isle of Man Court is very aware of the nuances of Manx practice, and the commercial reality of business life, when applying legal principles. With the process through from the claim form being issued to the final hearing and the Court’s judgment being completed within just several weeks, it is difficult to imagine any other jurisdiction in the world resolving this matter for the parties with any more expedition.
Acting for the Claimant: Gillian Christian as Consultant to Advocate John Rimmer (also of Keystone Law) and Robert Ham QC
Acting for the Defendant: Kevin O’Loughlin and Christopher Arrowsmith of Simcocks The full judgment can be downloaded here