Allnutt & Anor v Wilding & Ors

This is an appeal with the permission given by Arden LJ on 13 November 2006. The appeal is from the order made by Rimer J on 26 July 2006. He dismissed a claim by the appellant trustees (“the trustees”) for rectification of a settlement made on 18 December 1995 (“the settlement”). I shall refer to the late Mr Malcolm Strain, who made the settlement, as “the settlor.”

It is an unusual claim. In brief it is that:

The aim of those instructions was to achieve a saving of inheritance tax on his death. So he paid the sum of £550,000 to the trustees of the settlement in 1995 under a mistaken belief that the transfer would be a PET for inheritance tax purposes. It was not. The reason it was not was because the settlement contained discretionary trusts for the three children rather than creating interests in possession for them. The claim for rectification is that the settlement should be rewritten so that, instead of being a discretionary trust, it is an interest in possession trust, which would take effect as from the date of the execution of the original settlement. The settlement, as rectified, would then, it is argued, reflect the settlor’s true intentions and would thereby achieve the intended tax saving. The interested parties, who are the beneficiaries under the settlement, being the settlor’s three children, would obviously benefit from rectification if inheritance tax were not payable on their trust fund. Naturally, they consent to the relief claimed by the trustees.

The relevant evidence is contained in witness statements made by the trustees by the settlor’s solicitor, by his independent financial adviser and by the beneficiaries. None of these witnesses was cross-examined. There was no opposition to the relief that was claimed. The respondent beneficiaries were not even represented at the hearing before the judge.

As I have said, this is an unusual claim. I shall therefore turn first to the law regarding rectification. Mistake is undoubtedly a ground on which a court may set aside or rectify a voluntary settlement. Rectification is but one aspect of a wider equitable jurisdiction to relieve parties from the consequences of their mistakes.

The judgment of Millett J in the case of Gibbon v Mitchell is a valuable illustration of the limits of the remedy of rectification. In page 5 of his judgment, having reviewed the authorities, he came to this conclusion about the jurisdiction of the court to set aside voluntary transactions on the grounds of mistake:

Millett J was dealing with the jurisdiction of the court to set aside a voluntary transaction on the ground of mistake. But Millett J made it clear that it was not a mistake of the kind for which rectification was available. On the facts the settlor’s intention was to make a marriage settlement but it could not be carried out either by the deed which he executed or by that deed as rectified, or indeed by any other deed, because what was required, on the facts of that case, was an application to the court under the Variation of Trusts Act 1958. It was apparent from the face of the marriage settlement itself that the settlor was mistaken in thinking that it was legally possible for him to effect his intentions by the deed which he executed. But the judge made it clear that the remedy was not to rectify the settlement but to set it aside and then to make an application to the court under the Variation of Trusts Act. Such an application was then made in that case and it was granted by Millett J.

The relevance of that case to this is as follows. The trustees here do not ask this court to set aside the settlement on the grounds that a mistake was made by the settlor in executing a discretionary settlement instead of an interest in possession settlement. This is not surprising. The effect of setting aside this settlement would be that the funds would then form part of the settlor’s estate and would be liable to inheritance tax. It is, of course, impossible for any new settlement to be executed, which would have the tax advantages that the settlor and his advisers hoped to achieve.

The attraction of rectification is that, if it is available here, it will operate ex tunc and the disposition in favour of the children in the trust would take effect under the rectified settlement as from 18 December 1995, from which date the settlor lived more than the seven years that were necessary to achieve the tax saving.

I now turn to the trustees’ arguments on this appeal. I will comment on them in the course of setting out my reasons for the decision that I have reached. The judge said that the function of the discretionary equitable remedy of rectification is:

In other words, rectification is about putting the record straight. In the case of a voluntary settlement, rectification involves bringing the trust document into line with the true intentions of the settlor as held by him at the date when he executed the document. This can be done by the court when, owing to a mistake in the drafting of the document, it fails to record the settlor’s true intentions. The mistake may, for example, consist of leaving out words that were intended to be put into the document; or putting in words that were not intended to be in the document; or through a misunderstanding by those involved about the meanings of the words or expressions that were used in the document. Mistakes of this kind have the effect that the document, as executed, is not a true record of the settlor’s intentions.

Rimer J correctly commented that this case is far removed from the usual type of case in which rectification is, or might be, available. It is not a matter of correcting a mistake made in recording the settlor’s intentions by inserting words or deleting words, or putting in different words because the words that are there have the wrong meaning. The claim made by the trustees involves substituting a wholly different settlement, an interest in possession settlement, in the place of the discretionary settlement, on the general ground that the substituted settlement would achieve the tax saving which the settlor intended to achieve, but failed to achieve by the document that he executed.

In my judgment, there are serious difficulties in fitting the facts of this case into the legal framework for granting rectification. The trustees submitted that the judge took too narrow a view of the remedy of rectification by confining it to a case in which there was a mistake about the meaning of the document, whereas, on a proper understanding of the doctrine, it applied to a case such as this where the settlor was under a mistake about the effect of the document that he signed. In support of this proposition the trustees’ counsel, Mr Taylor, cited cases to this court which he said had been cited to the judge, though they were not mentioned in his judgment.

There were two cases. The first is AMP (UK) Plc v Barker, an unreported decision of Lawrence Collins J given on 8 December 2000. It was a claim for rectification of a pension scheme, rectifying the provisions which related to the calculation of benefits payable under the scheme. The part of the judgment relied on by Mr Taylor is that which deals specifically with the case of unilateral transactions in which, at paragraph 62, Lawrence Collins J said that, in the case of unilateral transactions:

We were next referred to paragraphs 69 to 71 of the judgment in AMP in which the judge considered the right to rectification. He relied on a quotation from Re Butlin’s Settlement in which Brightman J said this:

We were also referred to the case of Wolfe v Wolfe [2004] EWHC 2110 (Ch) which had been cited to Rimer J. In the section of the judgment dealing with the law of rectification, Mann J referred to the part of the judgment of Millett J in Gibbon v Mitchell to which I have referred and relied upon that passage because, as in the case of Gibbon v Mitchell, Mann J held that it was a proper case for making an order setting aside the transaction; it was not a case of rectification, it was a case of relieving a party from the consequences of a mistake by cancelling a transaction.

We were referred to paragraph 26 of Mann J’s judgment in which he quoted from Lawrence Collins J’s judgment recognising a distinction between effects and consequences. He quoted the passage which I have just read from the judgment in AMP and he went on to point out that the mistake of the Wolfes in the case before Mann J fell on the right side so far as they were concerned. They had made a mistake about the legal effects of the transaction. It was a significant one, and it was certainly serious enough to give rise to the equity of setting it aside. He concluded that, in those circumstances, the lease which the Wolfes had granted of their home to their children, fell to be set aside, because there was a mistake as to the legal effects of the transaction.

In reliance on those passages, Mr Taylor contended that the settlor in this case mistakenly thought that the settlement which he executed on 18 December 1995 would have the legal effect of enabling him to reduce liability to inheritance tax by making a PET to the trustees. He was mistaken because the settlement he signed did not have that effect. It did not enable him to make a PET because it was a discretionary settlement and not an interest in possession settlement. So, Mr Taylor argued, owing to a mistake in the nature of the trust contained in the settlement, the transfer of the funds did not have the legal effect that the settlor and his advisers intended. This was a mistake as to the legal effect of the document and, as in the case of Wolfe v Wolfe, this was a reason for the intervention of equity. The mistake that was made meant that the settlement did not accurately reflect the settlor’s intentions regarding the making of a PET and obtaining potential tax advantages.

I am unable to accept the trustees’ submission on the availability of rectification in this case. The position is that the settlor intended to execute the settlement which he in fact executed, conferring benefits on his three children. The settlement correctly records his intention to benefit them through the medium of a trust rather than the alternative of making direct gifts in their favour. I am unable to see any mistake by the settlor in the recording of his intentions in the settlement. The mistake of the settlor and his advisers was in believing that the nature of the trusts declared in the settlement for the three children created a situation in which the subsequent transfer of funds by him to the trustees would qualify as a PET and could, if he survived long enough, result in the saving of inheritance tax.

That sort of mistake about the potential fiscal effects of a payment following the execution of the settlement does not, in my judgment, satisfy the necessary conditions for grant of rectification. The mistake did not result in the incorrect recording of his intentions. I think that the judge put it well when he said the following in paragraph 23 of his judgment:

I agree with the judge’s analysis of the position. I would therefore reject the ground of appeal which asserts that the judge erred in taking too narrow a view of the law of rectification and in rejecting the claims of the trustees. I express no opinion on whether this would be a case for setting aside the settlement on the ground of a mistake. It is not necessary to express such a view because adopting such a course would not have achieved anything that the trustees wished to achieve in this litigation.

The remaining grounds of the appeal were that the judge made wrong “findings of fact” which should be overturned by this court. It was submitted that this court is in as good a position as the judge to interpret the uncontradicted written evidence that was submitted on behalf of the trustees. So it was contended by Mr Taylor in his skeleton argument that the judge wrongly found that the settlor did not make a mistake as to the effect of the settlement, and that the primary intention of the settlor was to distribute capital to his children after his death. He submitted that the judge should have found that the primary purpose of the settlement was to create a PET through the medium of the settlement, rather than by direct gift, by enabling a transfer to be made into the settlement which would be a PET. He submitted that the judge should have found that there was a mistake as to the meaning and effect of the settlement, namely whether the payment of funds into it would be a PET, and that the evidence on this was clear. The substance of the settlor’s intentions was to save inheritance tax and he signed a document which did not reflect those intentions and therefore the judge was wrong to refuse rectification.

My conclusion on these grounds of appeal is that this was not a case in which the judge made any findings of primary fact on the basis of conflicting evidence. In fact, it has been emphasised by Mr Taylor in his skeleton argument that the evidence in all the witness statements was not contradicted. The judge was not engaged in “finding” facts. All that he did was to summarise and evaluate the evidence and conclude that it was not good enough to establish a case for rectification. The evidence did not establish that there was a mistake in the recording of the settlor’s intentions or in the drafting of the document which he executed. The evidence did not establish that he had any intention to execute another document in a different form or with different trusts than the one he in fact executed.

In brief the position in this case is as follows: the settlor had no more than a general intention, well understandable, to save inheritance tax on his death, but without making direct gifts to his children. He had a general intention to benefit them through the medium of a settlement which, in combination with the PET, he hoped would result in the mitigation of inheritance tax on his death. The trustees were totally unable to point to any more specific intentions on the part of the settlor which, owing to a mistake made in the recording of his intention and in the drafting of the settlement, were not recorded in it or were misrecorded, and could be rectified by a decree of the court. In my judgment the judge was correct both on the law and on the evidence before him to reject the claim of rectification.

For the reasons given by the judge and for the reasons I have given, I would dismiss this appeal.

I agree. I would only add this. The claimant’s difficulty was not simply to establish a mistake such as would justify the intervention of the court, but also to show how the document should be corrected. The judge at paragraph 25 examined the alternative draft that had been put in front of him with the invitation that this should be the rectified form of the document. He concluded that, even if Mr Strain did not intend to establish a settlement in the form executed, the evidence fell short of proving that he intended the settlement to incorporate the various trust powers and provisions set out in the alternative draft..

I agree with that conclusion and the supporting reasoning. That in my view is an additional reason why this appeal must fail.

I agree with both judgments.