Wolff v Wolff

This is an application to set aside a reversionary lease granted by the claimants to their children (the first two defendants) as part of an inheritance tax saving scheme, a declaration as to whether that lease is held on the trusts of a certain settlement, and, insofar as may be necessary, an order setting aside that settlement, There was originally a claim for a declaration as to the effect of an ancillary letter of consent, but that claim was abandoned, The basis of the application to set aside those documents is that they were voluntary transactions of which the Wolffs had insufficient understanding, or alternatively that they laboured under a serious mistake as to their effect.

There are potential inheritance tax implications of my decision. That, I think, is why all aspects of the matter (save for one that was withdrawn) have been argued before me and not dealt with by consent. The Inland Revenue has indicated that it is content to be bound by my decision provided that certain authorities are drawn to my attention. All those authorities have been duly referred to.

Mr and Mrs Wolff, the claimants, are the freehold owners of 19 Rudall Crescent, London NW3. He is a company director, running a business selling tropical plants. Mrs Wolff is in business with one of her daughters, running a flower shop. At the end of 1996 a friend of theirs, Ms Sabina Comberti, told them about an inheritance tax saving scheme which she had entered into with the assistance of Mr E Kingshill (a solicitor) and some accountants. She gave them a copy of her scheme documents, or at least one of them. Mr and Mrs Wolff are now unable to tell me what they understood of the scheme at this stage but they did understand that it involved giving away their house to their daughters but still remaining entitled to live in it. They tell me that they are unable to recall anything else that was said at that point. However, they were apparently sufficiently attracted to the idea to make an appointment to see Mr Kingshill so that they could have such a scheme for themselves, and Mr Wolff rang him for that purpose on 17 December 1996. Mr Kingshill’s attendance note records that Mr Wolff said that they “would like to make a trust deed and grant a lease in the same way as” Ms Comberti had done. He records himself as saying that he would prepare the documents but could not guarantee it would work. His note records that Mr Wolff was taken aback by that, but thought it was worth risking £500 to perform the exercise. An appointment was made “to talk about the details” on 13 January 1997. From this I infer that Mr Wolff had some idea of the structure of the scheme — more than he now recalls having. I do not think it likely he would be expressing such keenness for a scheme of which he had the limited understanding that he professes in his witness statement. I confess to finding it surprising that he cannot give any further indication of what he thought the scheme was at that stage. One would have thought that he would have had a greater understanding of the sort of thing the scheme involved if he was to bother himself with taking it further, and I think that the thrust of the attendance note of the telephone conversation with Mr Kingshill tends to support that. However, that is what he says.

On 13 January 1997 they attended Mr Kingshill. Mr and Mrs Wolff each say that they cannot recall much about the meeting. They cannot recall any explanation of the scheme; they cannot recall any specific advice being given about the scheme other than that there was no guarantee it would operate. They both seem to have understood that there would be a lease of their house for the benefit of their daughters, and Mr Wolff understood it would be a lease which would not come into operation for 20 years. He says that Mr Kingshill did not explain what the effect of the lease was or what would happen when it came into operation. Mr Wolff says they assumed it would be a “paper exercise” (his words) only and that in practice nothing would change — they would be able to live in the property for as long as they wished, paying a “peppercorn rent of £1 per year”. Neither of them knew that the effect of the lease, when granted, would be that they would have no right to remain in the property and that they would be receiving, not paying, the peppercorn rent. Mrs Wolff professes not to have known what a trust and a lease really were.

Mr Kingshill prepared an attendance note of that meeting. The Wolffs do not dispute that it is an accurate record of the meeting, at least so far as it goes. He records that at the date of the meeting Mr Wolff was 61 and his wife was 60. He was given details of existing charges over the house, and he records that Mrs Wolff owned the freehold of another building which was leased to herself and her daughter for the purposes of their business as a flower shop. Then it records that the Wolffs have a copy of Ms Comberti’s trust deed and “you therefore know what is involved.” They had not consulted the accountant involved and did not propose to do so. Warnings were given that the scheme might not work, and that it was not necessary to go to tax counsel. The Wolffs are recorded as saying that they wanted to have the documents prepared fairly soon in case there was any change after the forthcoming general election. After some further immaterial material (that is to say, immaterial for the purposes of this application) Mr Kingshill then records that he would consider the advisability of including Mrs Wolff’s property in the trust deed and he said this would be fairly simple. I infer that this suggestion came from one or other of the Wolffs. Then the note says:

“I would let you have drafts of the Trust Deed and Lease and explained to you again briefly the implications. You would retain the freehold of 19 Rudall Crescent and you would grant a Lease to start in 20 years’ time. I explained that it would be necessary for this to become effective in less than 21 years’ time to comply with the provisions of the Law of Property Act 1925.”

Quite what Mr Kingshill did explain at the meeting remains a matter of some doubt. However, I think that some of the material in that note is at odds with the professions of ignorance currently made by Mr and Mrs Wolff. Mrs Wolff professes to have been ignorant of what a lease really was (whatever that may mean); yet she herself had already granted and received the benefit of a lease of her shop, and the overall concept is not very difficult. They both profess ignorance of what the trust involved; yet they were apparently proposing the addition of other properties to it. The thrust of their evidence is that they went into the meeting not really knowing what the scheme was, and they came out of it not knowing much more; yet they had an opportunity to correct Mr Kingshill when he said (as he seems to have done) that they knew what was involved (or they may even have said it themselves). All this, and later correspondence to which I will briefly refer, leads me to treat their protestations of ignorance with some caution, although I bear firmly in mind that I did not see either of them in the witness box and none of this evidence was subjected to the scrutiny of cross-examination.

The scheme documents were then prepared by Mr Kingshill. They were twofold. First, there was a reversionary lease of the house in Rudall Avenue, in favour of the two daughters (the first and second defendants). It is dated 4 June 1997 and is for a term of 125 years starting on 4 June 2017 at the yearly rent of a peppercorn (if demanded). Other than that, it is in a fairly standard form. The trust deed, however, is not what one might expect. It, too, is dated 4 June 1997, and is between the Wolffs as settlors, the Wolffs and Mr David Grace (the third defendant) as trustees, and two mortgagees (Northern Rock Building Society and Barclays Bank). It recites that the settlors desired to make a settlement in favour of the daughters and had transferred to the trustees £1,000 and the lease of Rudall Crescent. In clause 2 it declared trusts which gave the income to the daughters “in their lifetime” and “subject thereto” gave the capital and interest to such of their children as attained the age of 18 in such proportions as the trustees might appoint but otherwise in equal shares. Clause 3 then muddies the waters by declaring that after the end of the Specified Period (defined as 80 years) the trust property should be held for the daughters in equal shares, and on substitutionary gifts in favour of the daughters’ issue then living in equal shares per stirpes. There was no power to advance capital to the daughters. The mortgagees joined in the transaction to signify their consent.

This trust deed is manifestly defective as a piece of drafting. Not only do clauses 2 and 3 ostensibly conflict, but clause 3 (so far as intended to have any effect) purports to give interests to the daughters if alive at the end of a period at which point of time they would, if they were alive, be about 100 (if not more). Furthermore, it proceeded on the footing that the lease had been “transferred” to the settlement by the Wolffs when in fact it had been granted to the daughters. The interaction between this document and the lease is one of the questions that arises in these proceedings, and I shall deal with it further below. For present purposes it is merely necessary to note its purported effect and its defects.

Having prepared drafts, Mr Kingshill set about getting the consent of the mortgagees to the transaction. The details of this process do not matter, but what is of some significance is that the process demonstrated that Mr Kingshill did not have a clear idea of the structure that he had set up. On three occasions Barclays Bank pointed out that there seemed to be an error in that the settlors could not have settled the leasehold interest, and on each occasion Mr Kingshill completely failed to see the point. It becomes apparent from that that Mr Kingshill did not fully understand the implications of what he had brought about. He seems to have thought that the lease was settled on the terms of the trust, and was apparently unable to see why this was not the case. His lack of understanding is also apparent from other matters. When negotiating with Barclays Bank over the terms of a new charge over the leasehold interest, which the bank was insisting on, he misunderstood who the borrowers were and again apparently failed to understand the difference in the positions of the trustees and the daughters in relation to the whereabouts of the ownership of the lease. Then on 2 December 1997 Mr Wolff rang him asking him what would happen if he wanted to sell the house in a few years time. Mr Kingshill said that he could do so with the consent of his children. Mr Wolff said that there should be no problem with that, but it would be better to have it in writing, to which Mr Kingshill responded that he would draft a short agreement. He did that, and it was executed. The agreement recites the grant of the lease and the making of the settlement, and then says:

“[The daughters agree] that if [the Wolffs] at any time during their lifetime or the lifetime of the survivor of them wish to sell the Freehold of the [house] and to substitute whatever other property they intend to acquire for the [housel we ... will give our consent to such sale and purchase of an alternative property provided that it is included in a similar settlement notwithstanding that the cost of such alternative property may be less or more than the purchase price obtained for [the house].”

Again, there are all sorts of problems about this document, and it is unnecessary to enumerate them all, but for present purposes it is relevant to draw attention to three points. First, on this occasion Mr Kingshill has appreciated that the daughters, and not the trustees, own the lease, but he still considers that the settlement has some sort of interest. If it had some interest, the trustees ought to have been parties, yet they were not. Secondly, the circumstances and its terms tend to indicate that it was very much on the cards that the Wolffs would want to stay in the house for the rest of their lives (or certainly for a considerable period), although it provides for what is to happen if they do not. To that extent this material supports the case of the Wolffs that they were not told that there was or might be any problem should they wish to do so after the commencement of the term of the lease. Thirdly, it demonstrates that Mr Kingshill had not got to grips with the transaction, since it was manifestly inadequate to achieve its purpose. If the idea was to be able to require the daughters to join in a sale of the unencumbered freehold, far more than this agreement was required.

In the autumn of 2001 the Wolffs were reconsidering their wills. To that end they instructed Bircham Dyson Bell (Mr Lewin). They asked for and obtained the scheme documents and began to appreciate the inconsistencies within them. They asked Mr Kingshill about them and he replied (inter alia):

“The intention was (and I believe it is effective) for the daughters to have the leasehold and the Trustees to hold it on their behalf. As both deeds were completed on the same day, I think that the Lease forms part of the Trust and is therefore held by me on behalf of the Trustees.”

Yet again he failed to appreciate the defects in his documentation.

It was at some point shortly after that that the Wolffs were informed of an aspect of this matter which lies at the heart of the application before me. They were told of something that they tell me they had not hitherto appreciated, namely that from June 2017 they had no right to stay in the house and were at the mercy of their daughters or their successors in title to the lease. They say they had not appreciated that. If the daughters in fact allowed them to stay on free of charge, then the tax implications of that would be likely deprive the scheme of its inheritance tax saving features (and render it pointless) since the Wolffs would be continuing to receive a benefit. That could be avoided by their paying a market rent for the property, but they could not afford to do that, and never intended to do so. They say that none of this was pointed out to them by Mr Kingshill and had he done so they would never have entered into the scheme. They did so believing that it gave them the right (or did not deprive them of the right) to live in the house for as long as they wanted. Their then current plans were to live in the house well into their old age, if not for the rest of their lives, and they had carried out certain adaptations to facilitate that. Had they appreciated that the lease deprived them of the right to live in the house, they would not have entered into it.

They have a separate point in relation to the trust deed. I have already referred to its equivocation in its declaration of the beneficial interests. Whatever its effect, it does not give the daughters any (or any real) right or access to capital during their lives. That, say the Wolffs, was not part of their intention. They did not intend to confine the daughters to income interests, and were not told that the trusts did that. Had they been told that then they would not have executed the deed.

This last point only has any practical significance if the lease is held on the trusts of the trust deed. I have already pointed out the difficulties in this respect, and I shall deal with the legal effect below.

Originally I was asked to make a declaration as to the effect of the agreement of 23 March 1998 (relating to daughters’ consent to the sale of the “freehold”). However, this part of the prayer was withdrawn by Mr Brownbill, who appeared for the claimants, so I need say no more about it.

The Wolffs say that their failure to understand the effect of the lease, and the fact that the matter was not fully explained to them by Mr Kingshill, entitles them to have the lease and, so far as may be necessary that the trust deed, set aside. They also seek a determination as to whether the lease is held on the terms of the trust deed. Their case is that it is not. They face no opposition in relation to any of this from the other parties — as I have indicated, all parties have indicated that they do not intend to oppose the Wolffs. The daughters are the first two defendants, Mr Grace (the third trustee under the trust deed) is the third defendant. The fourth and fifth defendants are the minor children of one of the daughters (Nicola) and the sixth defendant is the minor child of the other daughter (Katrien). They are joined because they are interested under the terms of the trust deed, and they were represented by Mr Michael Nield of counsel. The unborn issue of the daughters are similarly interested, and in the normal way one would have expected Mr Grace (as trustee) to have represented their interests. However, it does not appear to have occurred to anyone hitherto that that might be appropriate, and in truth their interest is no different from that of the fourth to sixth defendants. Accordingly, in order to avoid what seemed like an unnecessary extra set of costs, I made an order that the fourth defendant should represent the interests of the unborn issue and Mr Nield represented them too.

The grandchildren and remoter issue whom Mr Nield represented are only interested in this litigation if the lease was held on the trusts of the trust deed. Mr Nield provided the next friend of the grandchildren with an opinion, a copy of which I have seen, in which he indicated that he did not see how it could realistically be argued on the available evidence that that was the case. He also advised that there was no realistic chance of avoiding the lease’s and settlement’s being set aside, In those circumstances he advised that it was not in the interests of the grandchildren to attempt to defend the action; and that was his position before me.

I make the following findings of fact.

First, I need to consider what the level of understanding of the Wolffs was, particularly in relation to their rights, obligations and status under the lease. They have painted a picture under which they were to a very significant extent ignorant of the effect of the main elements of the scheme. As I have already noted, Mrs Wolff says that she did not really know what a trust and lease were. The daughters and Mr Grace have provided witness statements which support this version of events, and gives evidence that they were themselves to a large extent ignorant of the transactions to which they were parties. The Wolffs’ respective witness statements contain constant references to their not being able to recall matters at the time. They have not been challenged in cross-examination on these matters, and it might be said that that limits the extent to which I should make any findings inconsistent with their witness statements. However, that does not mean that I have to accept everything that they say about this, or that they have given me a full picture of their respective understandings. Mr Wolff demonstrated an interest in being copied in on correspondence with Barclays Bank, which correspondence required an understanding to some significant level of some of the effects of carving a lease out of the freehold, and to some limited extent on the effect of a settlement. I think that his raising a question about what would happen if he and his wife wanted to sell the house demonstrated that he realised that the transaction had some real effect which would limit his freedom of action, contrary to his assertion that they had undertaken a paper exercise which in essence changed nothing. His inquiry at the meeting (repeated later over the telephone) as to whether additional property could be added to the trust demonstrates that he thought that something had changed, and that there was a different proprietary set-up which had come into existence and which could affect other property. I find it hard to believe that they went to Mr Kingshill in the first place in order to put a scheme in place with such a sketchy notion of what the scheme was, or that they left with the hardly less sketchy notion that they profess to have had (although they do accept that they understood a lease would be granted to take effect in the future, and if they did not have that notion before they must have got it at the meeting). In short they had some level of understanding of some of the elements of the transaction; but I am left in some ignorance of what it was,

However, in my view (and I find) they did not know of two key matters. The first is that they did not know that the effect of the lease was to deprive them of their right to occupy the property in 2017. In the context of this transaction it is entirely plausible that they would not necessarily know of that key fact, and that they would be left under the impression that their right of residence would be unaffected. They say that they do not remember Mr Kingshill giving any explanation of the scheme and how it operated. His note records that he “explained briefly the implications”, and I think he probably did. However, I see no reason to disbelieve the Wolffs when they say that he did not explain the effect on their right of residence, and I see various reasons for believing them. First, it is clearly an important point which ought to be explained if the solicitor appreciates it. It is worthy of note that in his attendance note of the preceding telephone call, and his note of the meeting, Mr Kingshill takes care to note that he told the Wolffs that the scheme might not work. That shows that he was aware of the importance of noting what he says about matters which ought to be drawn to the attention of the client. He even bothered to tell them, and then to note, the reasons why the lease had to take effect within 21 years. If he had warned them of the perils of their loss of rights of residence I think it highly likely he would have noted it. Next, there is perhaps an explanation of why he should have taken his eye off this particular ball. Ms Comberti was much older than the Wolffs and, while details of her transaction are not available, it might have been the case that her age meant that she was unlikely to survive to the commencement of the lease. The same could not be said of the Wolffs (they would each be about 80 in 2017), but Mr Kingshill might well have lost sight of that — he did not demonstrate consistently high standards of competence in the transaction elsewhere, as I have sought to demonstrate above. Thirdly, his drafting of the agreement of December 1997 tends to show that there was an unchallenged understanding that the Wolffs might want to continue to reside in the house (although the agreement seeks to cater for the alternative possibility) and it does not seem to have occurred to Mr Kingshill at that point of time that there might be a problem (or at least a legal problem) about that. Accordingly, I do not think that Mr Kingshill pointed out this fact at the meeting. There was certainly no other occasion on which he might have pointed it out — the facts demonstrate that there was no subsequent meeting to discuss and explain the terms of the draft documents, and no explanation given in correspondence. In the absence of such an explanation, I see no reason to disbelieve what the Wolffs say about their understanding in this respect. I also accept that they would not have entered into this transaction if its effect on their rights of residence had been pointed out to them. There is absolutely no reason why they would have been prepared to run that risk.

I turn next to their understanding about the settlement. In their respective witness statements the Wolffs say that they did not intend that their daughters should have interests in income only. They intended them to have access to capital. The trust deed does not give them any such access, and it therefore does not coincide with what they say their intention was. I accept their evidence on this point and find that they did indeed intend their daughters to be able to take capital and that they would not have entered into a scheme which did not provide for that.

So far as the lease and trust deed are concerned Mr Brownbill, on behalf of the Wolffs, relies on each of what he says is two lines of cases. The first line is said to show that a voluntary settlor can claim to have a settlement set aside if he made it under a mistake as to its effect. That, says Mr Brownbill, applies in this case because the Wolffs made such a mistake in believing, wrongly, that the lease did not affect their right to live in the property for as long as they wished. They also made a relevant mistake in relation to the trust deed, believing that it gave the daughters an interest in capital. The second line of cases is said to entitle a voluntary settlor to have a settlement set aside where there has been an inadequate explanation of the transaction and a lack of understanding of it — it will be set aside unless there is a sufficient level of understanding which brings home its effect, particularly where it is so improvident as to expose the settlor to the risk of destitution or something close to it. The Wolffs did not have that understanding or explanation in relation to the effects of the lease on their rights of occupation (and indeed their lack of understanding went further), and in relation to the effect of the trust deed. Although these lines of cases might sound as though they were so close as to be aspects of the same thing, Mr Brownbill submitted they were different and distinct.

The law on the first line of cases was considered by Millett J in Gibbon v Mitchell [1990] 1 WLR 1304. In that case a protected life interest was surrendered by the life tenant, who thereby intended to accelerate the absolute interest of the remainderman. He had not appreciated that the effect of the surrender was in fact to forfeit his life interest and bring into operation the discretionary trusts which followed it. Millett J set aside the deed under the “much wider equitable jurisdiction to relieve from the consequences of a mistake” (p 1307F). Having considered a number of cases (all of which have been shown to me by Mr Brownbill) he concluded (at page 1309E-F):

“In my judgment, these cases show that, wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it.”

In relation to four of the older cases and the case before him, Millett J observed that they were cases:

“where the party executing the deed intended to achieve a specific purpose but through a mistake on the part of the professional advisers who drew the deed it either did not achieve it at all or achieved something else in addition,” (page 1308H).

However, in the light of his general summary which I have quoted, I do not think that that dictum should be taken as being a limiting factor in relation to the jurisdiction.

Mr Brownbill seeks to deploy that principle. He says that the Wolffs made a mistake, and it was not merely as to the consequences of the transaction — it was a mistake as to its nature and what it had achieved and therefore as to its effect. They intended a transaction with a lease which left them with a right of occupation, and they got a transaction which was a lease which deprived them of a right of occupation.

I confess that originally I had thought that the mistake of the Wolffs (which I have found they made as a matter of fact) was more as to the consequences of their transaction than as to its effect (although that distinction is not always easy to grasp). They intended a lease to their daughters, and they knew that that would give their daughters an interest. The fact that the lease deprived them of their right of possession seemed to me to be more of a “consequence”, in the words of Millett J. On the facts, depriving them of their actual occupation was not even clearly a necessary consequence, because there is no suggestion that the daughters would evict them or even charge them rent. Were that to happen there would be tax consequences, but that is clearly a “consequence” in Millett J’s terminology.

However, I have been persuaded that my initial reaction was wrong. The Wolffs intended to give away an interest to their daughters, but there were limits to that gift. It was to take effect in the future, but even then it was not to deprive them of the rights of occupation free of charge that they had enjoyed hitherto. In fact and in law the lease deprives them of that right from June 2017. That seems to me to be an effect of the transaction — they have given away more than they intended. The matter can be tested in this way. Suppose that the lease took effect one day after its execution rather than 20 years, but the Wolffs still had the belief that they could continue to live in the property. Those stark facts show more clearly that their mistake was as to the effect of the transaction. In AMP (UK) plc v Barker [2001] PLR 77 at para 70 Laurence Collins J observed, in relation to Millett J’s distinction between effects and consequences:

“If anything, it is simply a formula designed to ensure that the policy involved in equitable relief is effectuated to keep it within reasonable bounds and to ensure that it is not used simply when parties are mistaken about the commercial effects of their transactions or have second thoughts about them. The cases certainly establish that relief may be available if there is a mistake as to law or the legal consequences of an agreement or settlement.”

If that is indeed the significance of the distinction, then the mistake of the Wolffs in this case falls on the right side of the line (so far as they are concerned). They made a mistake as to the legal effects of the transaction, and it was a significant one. It is certainly serious enough to give rise to the equity of setting it aside.

In those circumstances the lease falls to be set aside.

That conclusion renders a decision on the other points academic. However, I make the following observations on them.

So far as Mr Brownbill’s alternative line of cases is concerned, I rather doubt if it can now be taken to exist. The jurisdiction seems to me to be based on mistake. One of the high water marks of this alternative line, so far as Mr Brownbill was concerned, was Philippson v Kerry (1863) 32 Beav 628, where an elderly lady gave away a material part of her wealth believing that the donee would give her the dividends for the rest of her life. She received no explanation of the consequences of the transaction. On analysis I think that this can be treated as a mistake case, and Millett J certainly treated it is one — see his rationale of it at 1309D. Mr Brownbill did cite other cases on the point, but I do not need to deal with them.

Had it been necessary for me to do so, I would have held that the trust deed fell to be set aside for the same reason as the lease. The Wolffs clearly intended their daughters to have capital or access to it, and the trust deed, whatever else it might have done, did not do that (or at least not in any meaningful way — they might have had capital if they survived for 80 years). However, I do not need to consider this further since the setting aside of the lease will mean that there is no asset in the trust.

This, too, is an academic question in the light of my conclusion that the lease falls to be set aside. However, I will express my conclusions on it briefly because I indicated them to counsel during the hearing as a result of which Mr Nield did not need to make any submissions to me. My conclusion, as I indicated it without any argument other than that appearing in the skeletons, was that the lease would not have been caught by the trusts of the trust deed. The lease was not conveyed to the trustees (contrary to its recital), and the grant of the lease to the daughters was a deliberate, even if misguided, act, There was no agreement with the daughters that they should hold as nominees for the trustees, and the material that I have seen does not justify any form of equitable obligation that they should so hold it. To require them so to hold it would actually have been inequitable, since the trusts of the settlement did not coincide with the intentions and instructions of the Wolffs. Quite how Mr Kingshill thought the thing would work is a matter of speculation (I have not had any evidence from him) but whatever he might have thought the participants did not have any clear view on the point, nor did they act, so as to justify a finding of that form of nomineeship. Mr Nield was therefore quite right to advise that there was no real prospect of establishing that the lease was held for the trust as a trust asset.

I will therefore make an order setting aside the lease and such other orders as appear to be appropriate after hearing argument from counsel.