Pitt & Anor v Holt & Anor

The First Claimant, Mrs Pitt, seeks declarations to the effect that she is entitled to unravel a settlement and an assignment made by her as receiver for her late husband on 1 November 1994. I shall call them respectively the Settlement and the Assignment. Her late husband had been seriously brain damaged in a road accident. It was decided to put the money to which he became entitled under a compromise of his damages claim, and which was needed for his care, into a settlement. However, the Second Defendant (“HMRC”) says - correctly - that the form of settlement adopted was such that a liability arose to inheritance tax under the Inheritance Tax Act 1984; the tax became payable (1) on the creation of the Settlement (2) on subsequent capital distributions (3) after 10 years and (4) on Mr Pitt’s death. The inheritance tax position was not taken into account at all by Mrs Pitt and her advisers when the Settlement was set up. If it had been appreciated, it would have been clear that it would have a serious impact on the worth of Mr Pitt’s damages. But, the problem could readily have been resolved by the adoption of a different form of settlement. As it is, Mrs Pitt now has to accept that HMRC is correct and that there is a large inheritance tax liability unless the Settlement can be set aside.

Quantification of the amount of tax involved is not yet possible, and both Counsel were reluctant even to suggest an approximate figure to me. The uncontroverted evidence is, however, that the present liability including both interest and penalties (if exacted) would be between £200,000 and £300,000. And Counsel were at least agreed that the initial tax charge on the setting up of the Settlement and the Assignment would have been in the order of some £100,000.

On Mrs Pitt’s case before me the Settlement and the Assignment may be avoided because the inheritance tax position was simply ignored at the time the arrangements were made. She seeks to make out this case on either or both of two grounds: (1) the so-called rule in Hastings-Bass and (2) mistake. If she succeeds, then the current tax liability will disappear whether because the transactions were void at the outset or pursuant to section 150 of the Inheritance Tax Act 1984. For its part, HMRC contends that the rule in Hastings-Bass does not apply in the present context and in any event that its development in a number of first instance decisions has taken a wrong turn. HMRC also submits that there was here no operative mistake. It expresses sympathy with Mrs Pitt’s position but says that her remedy, if any, lies against her former advisers.

The claim came on for hearing before me as a Part 8 claim. Mrs Pitt, the First Claimant, is both a personal representative of Mr Pitt and the sole beneficiary under his Will. She was also his receiver by appointment of the Court of Protection, and she is one of the trustees of the Settlement. The other Claimant, Mr Shores, is also a personal representative of Mr Pitt and a trustee of the Settlement. The First Defendant, Mr Holt, did not appear before me and has taken no part in the action; he was joined as a party because he is the other trustee of the Settlement. The effective Defendant resisting the claim is HMRC. All the evidence was given in witness statements, and there was no cross-examination. The material facts were not in dispute at all.

Mr and Mrs Pitt were persons of relatively modest financial resources who lived together in a farm house near Frome. On 6 April 1990, which seems to have been his 57^th birthday, Mr Pitt was badly injured in the road accident which I have mentioned. He suffered multiple injuries including, in particular, very serious head injuries such that he became permanently unable to manage his own affairs. Mrs Pitt was accordingly appointed his receiver under the Mental Health Act 1983 by the Court of Protection.

Proceedings were commenced in the Bristol District Registry in the name of Mr Pitt, acting by Mrs Pitt as his next friend, for damages for negligence against a Mr Breen. It seems that an interim payment of £350,000 was made by Mr Breen’s insurers. Ultimately, the whole damages claim was compromised for £1.2 million with the approval of the Court being given on 9 May 1994. It was agreed that the compromise was to be implemented by way of a structured settlement. The structured settlement involved payment to Mr Pitt of a lump sum, the previously paid interim payment having been apparently spent, with Mr Breen’s insurers undertaking to pay Mr Pitt an index linked annuity of £2,418.75 per month during his lifetime.

Mrs Pitt was advised by solicitors. She also retained financial advisers, then called Frenkel Topping Limited and now called Frenkel Topping Financial Services Limited. I shall refer to them as Frenkel Topping. They were concerned to assist Mrs Pitt with devising financially prudent arrangements for dealing with the proceeds of the compromise in the best way to provide for Mr Pitt’s needs. It was decided that the best way to proceed would be for the cash to be invested and put into a settlement into which the annuity would also be assigned.

The documents show that there were two main expressed reasons why the creation of a settlement so as to divest Mr Pitt of both the lump sum and the annuity was thought desirable: first, it was thought that any potential means tested reduction of state benefits for Mr Pitt would thereby be avoided and, secondly, there was a suggestion that the funds might be sheltered from a sizeable monetary claim which Mr and Mrs Pitt’s bank had against them. I make no comment on the efficacy under either head. It is, however, possibly of some materiality to say that in the event Mr Pitt never did receive any means tested state benefits. A third possible reason as explained by Mr Henderson on behalf of the Claimants would have been that, with the funds being taken out of Mr Pitt’s own control, continuing Court of Protection charges would be avoided.

The documents before me suggest that Frenkel Topping gave thought to the creation of two forms of discretionary settlement, one under which Mr Pitt would be the sole beneficiary and another under which the discretionary beneficiaries would also include Mrs Pitt and their children. In the event Mrs Pitt, acting of course on the advice of her advisers, decided that the sensible course would be to create a discretionary settlement under which she and the children would also be beneficiaries along with Mr Pitt. A proposal to that effect was therefore put forward to the Court of Protection. It was supported by a report from Frenkel Topping, of which only an unsigned draft is currently available to Mrs Pitt, and an affidavit from the solicitor then representing Mr and Mrs Pitt. The documents before me show Frenkel Topping addressing questions of both income tax and capital gains tax. However, nobody (including the Official Solicitor who represented Mr Pitt before the Court of Protection) gave any thought at all to the question of liability for inheritance tax upon the transfer of assets into a discretionary trust and the trust’s subsequent operation.

On 12 September 1994 the Court of Protection made an Order authorising Mrs Pitt, as Mr Pitt’s receiver and in his name, to execute a settlement and an assignment of the annuity into the settlement in approved forms. This followed an earlier hearing before, and amendments to the proposed form of the documents by, the Master of the Court of Protection. Mr Henderson emphasised before me that the Order of 12 September 1994 did not direct Mrs Pitt to execute the documents. It only gave her the authority. Hence, she was not obliged to enter into the transactions and would still have had discretion to refrain from doing so if it were not in the best interests of Mr Pitt.

Armed with authority from the Court of Protection, on 1 November 1994 Mrs Pitt as receiver for and in the name of Mr Pitt executed both documents. Under the terms of the Settlement, £412,414.22 plus interest, which had remained in court on compromise of the case against Mr Breen, plus any subsequently transferred assets was to be the trust fund and to be vested in trustees. The trust fund was to be held on discretionary trusts under which the beneficiaries were Mr Pitt, Mrs Pitt, and his children and remoter issue. The only constraint was that there could be no distribution to the children and remoter issue without the consent of the Court of Protection. On Mr Pitt’s death any balance of the trust fund was to be transferred to his estate, and it was also provided that subject to the approval of the Court of Protection Mr Pitt was to be entitled to revoke the trusts, wholly or in part. On the same day Mrs Pitt also executed for Mr Pitt the Assignment of the annuity to the trustees of the Settlement so that it was added to the trust fund.

The prime purpose of the trust fund within the Settlement was, of course, to provide for Mr Pitt’s future care. If any thought had been given to the inheritance tax position, the objective could readily have been achieved by the creation of a settlement which would have been exempt from inheritance tax. Discretionary trusts for disabled persons are expressly given exemption under section 89 of the Inheritance Tax Act 1984. The only modification which would have been required to the Settlement in order to bring it within the exemption would have been to include a clause to the effect that at least half of the trust fund applied during Mr Pitt’s life was to be applied for his benefit. As drafted, however, there was no such restriction. Hence the full charge to inheritance tax arose.

Before me Miss Harman for HMRC faintly suggested that there might have been some advantage by way of flexibility in not having the 50 per cent restriction in the Settlement necessary to bring it within section 89 of the 1984 Act. However, Mr and Mrs Pitt were living together, she was the person caring for him and the trust fund was needed for his care. It is clear from the evidence that Mr and Mrs Pitt had very limited means apart from the trust fund. Mr Pitt obviously could not work, and Mrs Pitt had to look after him. There was no income, and the only appreciable asset was the family home which was (in due course) charged to the bank to secure a debt of about 50 per cent of the house’s value. Any loss of “flexibility” would have been wholly insignificant by comparison with the inheritance tax saving which could so easily have been achieved if any thought had been given to the matter.

It appears that it was not until towards the end of 2003 that it came to be appreciated that there was in fact a large inheritance tax liability. It came to light when advice was being sought about Mr and Mrs Pitt’s respective wills. The matter was taken up with Frenkel Topping. Eventually proceedings for professional negligence were issued against them by Mr Pitt and the trustees of the Settlement. Frenkel Topping deny liability on the ground, amongst other things, that they were not retained to advise on the inheritance tax consequences of the Settlement. The action against Frenkel Topping has been stayed for the present pending the outcome of the present proceedings before me. Clearly, the result of this case will be material to the amount of damages, if any, recoverable if liability were to be established against Frenkel Topping.

Before turning to the legal issues which arise on the present facts I need only mention for completeness a few further matters. Mr Pitt died on 25 September 2007. Mrs Pitt is the sole beneficiary under his estate. If the settlement is now avoided, there would be no effect on any third party. Moreover, as I have previously noted, in his lifetime Mr Pitt never did receive any state benefits so that the avoidance of the settlement would not be affected by any consideration in that regard. There remained at the time of Mr Pitt’s death only, on Mrs Pitt’s case, £6,259 within the Settlement. That sum now forms part of his estate in accordance with the terms of the Settlement. The annuity, which had risen to about £40,000 per annum, ceased with his death.

In order to set the parties’ contentions before me, particularly the submissions of HMRC, in context, I should say a few general words about the rule in Hastings-Bass. It takes its name from the decision of the Court of Appeal in Re Hastings-Bass, Dec’d [1975] 1 Ch 25. In that case the Inland Revenue Commissioners were contending inter alia that a purported exercise of a power of advancement by trustees had been ineffective because in the exercise of the fiduciary power trustees had not applied their minds to a material point. In a well known passage Buckley LJ, giving the judgment of the Court, said at page 41F-H:

Buckley LJ’s statement was expressed in the negative. However, in a series of subsequent cases, beginning with Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, (where Warner J appears to have first used the phrase “the rule in Hastings-Bass”) the courts have positively applied the principle that an exercise of a power by trustees may under certain conditions be ineffective if they fail to take into account a material consideration. In Mettoy Warner J said at page 1624B-D:

Several cases since Mettoy have considered and applied the rule. Notably, it has been applied so as to invalidate decisions of trustees who had not taken into account or had misunderstood the potential tax consequences of a decision. I shall have to address these cases later in this judgment because there is no doubt that they are inconsistent with the argument of HMRC before me. Indeed, Miss Harman accepts that this is so. Her case is quite simply that they were wrongly decided. For the moment, however, I need do no more than go to the decision of Sieff v Fox [2005] 1 WLR 3811 where Lloyd LJ’s judgment represents a comprehensive synthesis of the current state of the law. Lloyd LJ decided the case at first instance but gave judgment after his appointment to the Court of Appeal.

Sieff v Fox was a case where the advisers to trustees wrongly advised the trustees about the tax consequences of exercising a power of appointment in a certain way. As a result a large unforeseen Capital Gains Tax liability arose. The trustees sought to set aside the appointment in reliance on the rule in Hastings-Bass. It was also sought to avoid the transaction on account of a mistake by an individual personally, Lord Howland. Lloyd LJ upheld the claim under both heads. He summarised the Hastings-Bass principle as he saw it at paragraph 119 of his judgment where he said:

As Lloyd LJ noted in the Sieff case, the scope of the Hastings-Bass principle has been a matter of some debate both amongst commentators and in judgments. Its outer limits have not been the subject of clarification by the Court of Appeal, and concerns have been expressed about the ramifications. The ability of equity to set aside a voluntary transaction (as opposed to a contract) for mistake is, on the other hand, well established. The circumstances in which a transaction may be avoided for mistake are more circumscribed than those in which the rule in Hastings-Bass may come into play. Lloyd LJ drew attention to the distinction at paragraph 108 of his judgment in Sieff where he said:

A mere failure by someone to take a material consideration into account in the conduct of his own affairs will not justify setting aside for mistake. It was said in argument before me that the law allows you to be as foolish as you like with your own property. On the other hand, there certainly is jurisdiction, irrespective of any trust or fiduciary element, to set aside a voluntary transaction where there has been an operative mistake. Nevertheless, for the rule in Hastings-Bass to apply there is no need to identify a mistake as such, as opposed to a failure to take a relevant consideration into account.

Before examining in more detail the parties’ contentions in the present case, it may be convenient to note three points which it is common ground do not arise for my decision on the facts of the present case. It is material to bear in mind what I do not have to decide in the light of the debate to which I have referred over the potential reach of the rule in Hastings-Bass. First, it is agreed before me that for the rule to apply there is no need to identify a breach of duty by trustees or their advisers. To that extent I should follow Lloyd LJ in Sieff and not Lightman J in Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409. Second, it is common ground that the interesting discussion which one sees in the cases about whether application of the rule results in a transaction being void or voidable does not affect the present case. On the facts here there is no feature which would militate against avoiding the Settlement if it were voidable rather than void. The third feature of common ground is that, if Mrs Pitt is to succeed under the rule in Hastings-Bass, I must be satisfied that she would not have entered into the Settlement if she had appreciated the inheritance tax consequences rather than merely that she might not have done so.

When Mrs Pitt effected the Settlement she did so in her capacity as Mr Pitt’s receiver. Her power as such receiver to dispose of Mr Pitt’s property was clearly a fiduciary power. Mr Henderson submitted that it was immaterial for the rule in Hastings-Bass to apply that Mrs Pitt, as Mr Pitt’s receiver, was not his trustee acting under a trust instrument. It is true that that the context in which application of the rule has previously arisen is that of an act by a trustee. However, Mr Henderson submitted that it was sufficient for the principle to apply that the person who made the decision under challenge did so as a fiduciary for another and not for himself.

Mr Henderson referred me to other contexts where a decision may be set aside if the decision maker has failed to take into account a consideration that he ought to have taken into account. A primary illustration arises, of course, with the Wednesbury principle in public law. Mr Henderson prayed in aid what Chadwick LJ said in Edge v Pensions Ombudsman [2000] Ch 602 at 627E-630B about the “ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power” when comparing the duties of trustees with the duties of public bodies under the Wednesbury principle. He also drew my attention to other contexts where the exercise of a power has been set aside for a failure to take into account a relevant consideration. For example, in Byng v London Life Association [1990] 1 Ch 170 a decision by the chairman of a company meeting was set aside on the ground that, although acting good faith, he had failed to take into account relevant factors in the exercise of a discretion as chairman; similarly, in Hunter v Senate Support Services [2004] EWHC 1085 (Ch) a decision of company directors was set aside because they had failed to take into account considerations which they ought to have taken into account.

In Equitable Life Assurance Society v Hyman [2002] 1 AC 408 at [16] – [18] Lord Woolf MR referred to the “marked similarities” between the duties of directors and the duties of public authorities in the exercise of discretionary powers. Mr Henderson even went so far at one point as to submit that there was a common theme that, whenever the law imposed a duty to take all material considerations into account, a decision reached without doing so could be susceptible to being set aside under the rule in Hastings-Bass. However, he also stressed that it was unnecessary for present purposes to go further than to say that, as far as the exercise of a fiduciary power was concerned, there was no difference in principle between the duty of a trustee and the duty of a fiduciary such as Mrs Pitt in the exercise of her function as receiver. In support of that submission he referred me to Lewin on Trusts (18^th ed) at paragraphs 29-111, 29-120, 29-124 and 29-165. If a trustee or other fiduciary fails to take a material consideration into account, then the rule in Hastings-Bass should be equally applicable. There is, Mr Henderson submitted, no difference in principle between the two situations.

On the basis that the Hastings-Bass principle would apply to a disposition of another’s property by a fiduciary like Mrs Pitt, then Mr Henderson submitted that each of the three requirements of the rule was amply satisfied on the present facts. The impact of inheritance tax on a discretionary trust was a highly material and significant matter to consider. Mrs Pitt evidently did not take it into account. And it was, Mr Henderson submitted, clear on the evidence that if inheritance tax had been considered Mr Pitt’s lump sum damages and annuity would not have been put into the Settlement, at least not in the form which it took.

Mr Henderson also submitted that Mrs Pitt was entitled to avoid the Settlement as a voluntary disposition to the trustees which was vitiated by a mistake. This was not a rectification case since he acknowledged that one could not identify some provision which was intended to be provided for in the Settlement but was in error not so provided. Rather, his contention was that I should apply a broad test expressed by Lindley LJ in Ogilvie v Littleboy 13 TLR 399 at 400 as “some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him”. In Mr Henderson’s submission there was a tension between such a broad approach and a narrow approach as expressed by Millett J in Gibbon v Mitchell [1990] 1 WLR 1304 at 1309E-F:

A contrast between effect on the one hand and consequences on the other hand is not always readily apparent and, Mr Henderson submitted, should not lead to immediate taxation results being left out of account for the purposes of the law of mistake. Indeed, in the Sieff case Lord Howland misunderstood the tax consequences, although it is right to say that his mistake was also about the terms of the settlement itself: see [2005] 1 WLR 3811 at 3846A-B.

In the context of arrangements made with a view to fiscal advantage my attention was also drawn to the decisions of Mann J in Wolff v Wolff [2004] WTLR 1349 and of Lewison J in Re Griffiths [2009] Ch 162. However, the former was on analysis a case of a misunderstanding of the legal effect of documents. As for Re Griffiths, that was a case of a mistake of fact about the transferor’s state of health, which was critical to the decision to make the potentially exempt transfers. Neither decision is comparable to the present case where the achievement of tax benefits was certainly not the central objective of the transaction. Moreover, unlike those cases, the present case is not concerned with either a misunderstanding of what documents say or any mistake of anterior fact. They are in my view of limited assistance to what I have to decide.

For HMRC Miss Harman submitted that neither the rule in Hastings-Bass nor the equitable principles in relation to mistake could avail Mrs Pitt. She commenced her submissions by drawing my attention to a number of articles in legal journals and to a transcript of an extrajudicial address by Lord Neuberger of Abbotsbury in which the scope of the rule in Hastings-Bass was critically considered particularly in the context of tax planning. Against that background Miss Harman submitted that I should be concerned to confine the principle within narrow bounds.

Miss Harman’s central submissions on the Hastings-Bass principle were twofold. First, the principle has only ever been applied in the context of dispositions by trustees. Mrs Pitt was Mr Pitt’s receiver, not trustee, when she created the Settlement. Miss Harman accepted that Mrs Pitt was a fiduciary for Mr Pitt when acting as his receiver, but she maintained that one should regard the establishment of the settlement as equivalent to an act done by Mr Pitt himself and hence outside the scope of the rule in Hastings-Bass. Second, Miss Harman invited me not to follow the line of first instance cases. In Miss Harman’s submission operation of the principle should be confined to cases where the immediate purpose of the act in question was not achieved, cases where, in her words, “the plan has not worked”. Fiscal consequences were, she said, always irrelevant. Miss Harman accepted that her approach could not be reconciled with the first instances authorities, including in particular the decisions of Patten J in Abacus Trust Company (Isle of Man) Ltd v NSPCC [2001] STC 1344 and Parker J in Green v Cobham [2002] STC 820. Nor could it be reconciled with the judgment of Lloyd LJ in Sieff. But, she said the law had taken a wrong turn, and I should not follow these authorities.

As for mistake, Miss Harman invited me to follow what Millett J had said in Gibbon v Mitchell. The dividing line was between cases where a particular desired objective was not achieved because of a mistake and cases where the objective was achieved but there was some unforeseen effect. I was referred to what Davis J said in Anker-Petersen v Christensen [2002] WLTR 313 at 330H when considering Millett J’s distinction between “effect” and “consequences”:

The first question which I have to decide is whether the rule in Hastings-Bass is even capable of applying to the disposition by Mrs Pitt of Mr Pitt’s funds to the trustees of the Settlement. She made this disposition, of course, in her capacity as Mr Pitt’s receiver. Under sections 95-96 of the Mental Health Act 1983 the judge (which includes the Master of the Court of Protection: section 94) has broad powers of dealing with the property of a patient both for the patient’s maintenance and benefit and for those of his family or others whom the patient might have been expected to provide. The status of a receiver such as Mrs Pitt is as set out in section 99(2) of the Act as follows:

It was common ground before me that Mrs Pitt’s power to deal with her husband’s property was a fiduciary power. Clearly, it had to be exercised in Mr Pitt’s best interests. I was not referred to any decided case which had turned on the question whether a person in a position comparable to that of Mrs Pitt had a duty to take all relevant considerations into account when dealing with the property of the person with whose affairs he or she had been entrusted. In principle, however, it is hard to see why there should not be such a duty given that the situation is one of a discretion being exercised for the benefit of another.

Despite what I have said, I have difficulty in accepting the extreme form of Mr Henderson’s submission to the effect that the rule in Hastings-Bass does, or ought to, apply whenever there is a duty to take all relevant considerations into account. I agree with Miss Harman that, whilst the obligation to consider the relevant and disregard the irrelevant does indeed have echoes of the public law Wednesbury principle, application of the rule in Hastings-Bass is not simply an application of a single unified principle. There certainly are differences. Thus, for example, in public law a contravention of the Wednesbury principle will, subject to discretion as to the remedy, normally result in the challenged decision being quashed and remitted to the decision maker for reconsideration. An applicant does not have to demonstrate affirmatively that the original decision would have been different if the decision maker had applied himself properly. Similarly, flawed decisions of trustees are not remitted to them for re-taking; under the Hastings-Bass principle a flawed decision is simply treated as ineffective. Public law cases, like the company law cases to which I was referred, are certainly interesting analogies, particularly in that they, like discretionary decisions of trustees, concern the exercise of discretionary powers for the benefit of others. But, they are only analogies.

Nevertheless, Mr Henderson did not need to go so far as to say that the rule in Hastings-Bass will apply whenever a person has an obligation to take the relevant into account before exercising a power. It is sufficient for his purposes that the rule would be capable of application to the exercise of discretionary power by a person in a fiduciary position, not just a trustee acting under a trust instrument.

I do not accept Miss Harman’s contention that I should regard Mrs Pitt’s decision to conclude the Settlement and Assignment exactly as if it were Mr Pitt’s own decision. Of course, the effect of execution by a receiver is vis-à-vis third parties as effective as execution by the patient himself, assuming he were capable of managing his own affairs. But, it would be artificial to say that accordingly a decision by a receiver is for all purposes to be treated as a decision by the patient. An individual may be free, when deciding for himself, to ignore whatever consideration he sees fit to ignore. But, the position of a fiduciary is quite different from the position of an individual making up his own mind for his own benefit.

Miss Harman also urged upon me a “floodgates” argument if one were to extend the rule in Hastings-Bass beyond trustees, strictly so described, to all fiduciaries. I do not consider that applying the rule to a receiver under the Mental Health Act 1983 necessarily entails extending it to all fiduciaries. The nature of different fiduciary relationships is very variable. Often a fiduciary will be required to follow the instructions of a principal. In such a case, it may be that the Hastings-Bass principle would not apply, although I should not be taken as expressing any view on the question. I am solely concerned with a discretionary power exercised by a receiver for a patient under the Mental Health Act 1983.

Whilst there is no decided authority applying the Hastings-Bass principle to anyone other than trustees strictly so called, the passages in Lewin on Trusts to which Mr Henderson referred me certainly support the proposition that it is capable of application to other fiduciaries. Moreover, the judgments in the decided cases do from time to time refer interchangeably to “trustees” and to “fiduciaries”. It seems to me that in principle there is no material distinction between a trustee exercising a power for the benefit of a beneficiary under a trust instrument and a receiver exercising a power for the benefit of a patient pursuant to the Mental Health Act 1983. In each case the power is, as is common ground, a fiduciary one. In each case, the person exercising the power is doing so in the interests of another but is not acting on the instructions of that other. The critical point in the present circumstances is that it was for Mrs Pitt to decide whether or not it was in Mr Pitt’s interest for her to dispose of his property to trustees under the Settlement. I therefore conclude that, aside from Miss Harman’s second submission, the rule in Hastings-Bass would be capable of application in the present circumstances

I now turn to Miss Harman’s fundamental attack on the rule in Hastings-Bass as it has been developed in the cases. I acknowledge and understand the concerns which have been expressed about the scope of the rule. Criticism of the rule has been voiced in the context - far from the present context - of tax planning which has gone wrong. The difficulty, however, is to find a principled restriction of the rule. I note that in the Sieff case Lloyd LJ was of the view that the potential for an extreme reach of the rule was to be addressed as follows:

It may well be that the time is ripe for the Court of Appeal to consider the rule in Hastings-Bass. Save for a brief, but certainly not critical, reference to the rule in Stannard v Fisons Pensions Trust (1992) IRLR 27, all the authorities since the original Hastings-Bass decision are at first instance. However, there is no doubt that Miss Harman’s submissions do not fit with the formulation of the rule as it appears from these authorities. In particular, the submission that tax consequences are always irrelevant is directly contrary to the authorities. In the Abacus Trust v NSPCC case Patten J applied the rule to the exercise of a power of appointment which had been made without properly considering and applying legal advice; the consequence was a large capital gains tax liability. Green v Cobham was perhaps an extreme case. There, Parker J declared that a deed created in exercise of a power of appointment was invalid because the trustees had not had regard to the capital gains tax consequences if (as in fact happened) the non-resident status of one of the trustees were to change. Similarly, Burrell v Burrell [2005] STC 569 was another case where Mann J applied the rule where trustees had failed properly to take tax consequences into account. And, as I have already said, in the Sieff case Lloyd LJ was “in no doubt” that fiscal consequences might be relevant.

It is, of course, technically correct, as Miss Harman reminded me, that these first instance decisions are not binding upon me. Nevertheless, I would be most reluctant to depart from such a consistent line of authority unless perhaps I were persuaded that some critical error had been made and thereafter overlooked. Miss Harman did not suggest that this was the case.

I am unable to accept Miss Harman’s formulation of the rule in Hastings-Bass. It was not only unsupported by any authority but it was directly contrary to the authorities. Moreover, the formulation would seem to me to make virtually indistinguishable the circumstances in which the principle would apply and those where the law of mistake would apply. If Miss Harman were correct, the two effectively merge together although, as Lloyd LJ noted in Sieff, they have developed along different lines. The former is concerned with failures in the exercise of fiduciary powers over property beneficially owned by others, whereas an operative mistake may apply to errors with regard to one’s own property.

Applying the threefold test suggested by Warner J in Mettoy and the principles summarised by Lloyd LJ in Sieff, I consider that the present is a clear cut case on the facts for application of the rule in Hastings-Bass. It is fair to say that on that basis Miss Harman did not really suggest otherwise as far as the underlying facts of the case before me are concerned, apart from a few observations about the advantages of “flexibility” in the Settlement as drafted. Certainly, the evidence itself all pointed in one direction.

First, it seems to me to be obvious that anyone considering whether or not to enter into a discretionary settlement ought to take the tax, including inheritance tax, consequences into account. Plainly, tax in general was regarded as a material matter by Frenkel Topping who did address income tax and capital gains tax. Similarly, I was referred to a Practice Note of the Court of Protection which, although it does not refer to inheritance tax, adverts to the need for “a clear explanation of the incidence of capital and income tax liabilities” in proposals for, amongst other things, settlements. In the particular circumstances of Mr and Mrs Pitt, the impact of inheritance tax with the creation of a discretionary settlement was particularly important. It is plain on the evidence that the family’s financial resources were limited. The full damages award was needed for Mr Pitt to be looked after properly. Evidently, all liability to inheritance tax could readily have been avoided by compliance with section 89 of the Inheritance Tax Act, 1984, a provision specifically designed to cater for discretionary trusts for disabled persons like Mr Pitt. As it was, however, the worth of Mr Pitt’s damages award was seriously reduced by a large, but wholly unnecessary, charge to inheritance tax. I have no doubt that inheritance tax was a relevant consideration which ought to have been taken into account before the Settlement and Assignment were entered into.

Secondly, it is clear that the question of inheritance tax was simply not addressed by any of the advisers to Mrs Pitt and therefore not by Mrs Pitt herself. Nobody gave any thought at all to the matter.

Third, I have no doubt at all that, if Mrs Pitt had appreciated at the time that the mere creation of a discretionary trust not qualifying under section 89 of the 1984 Act was going to give rise to large inheritance tax liabilities, she would not have entered into the Settlement and Assignment as Mr Pitt’s receiver. The marginal advantages gained from the transaction for Mr Pitt would have been far outweighed by the inheritance tax disadvantages. The witness statement evidence from Mrs Pitt herself and Mr Shores is clear and unchallenged. Furthermore, it makes obvious good sense.

In the result, I conclude that the rule in Hastings-Bass does apply in the present circumstances and that the Settlement and the Assignment may accordingly be set aside as ineffective transactions. The Claimants are entitled to declaratory relief to reflect that conclusion. It is accordingly not strictly necessary for me to address the alternative way, based on mistake, in which the case for Mrs Pitt is put. Nevertheless, I should briefly deal with that aspect of the submissions.

Mr Henderson’s suggestion was, as noted above, that there was a divergence between what Lindley LJ said in Ogilvy v Littleboy and what Millett J said in Gibbon v Mitchell. He said I should prefer the former to the latter. I am not persuaded that there is in truth any real divergence. Lindley LJ was not considering, and did not purport to analyse, the type of mistake required for the setting aside of a voluntary disposition. He was concerned to stress that the mistake must have been a serious one and such as to lead to injustice if the gift were to stand. But, he did not address the sort of mistake which would suffice. By contrast Millett J in the Gibbon case was not dealing with questions of the gravity of the mistake or of the injustice if the disposition were not set aside. He was concerned to address at page 1309E-F the type of mistake which would or would not suffice for equity to interfere. Millett J’s formulation has been cited with evident approval in a number of cases since 1990. In my view, I should apply it as best I can in the present circumstances.

I consider that there is much force in what Miss Harman says about the present case not in reality being one of a mistake at all. It is not as if Mrs Pitt ever wrongly thought, for whatever reason, that inheritance tax would not be payable. She simply never thought about it at all. I certainly accept that if it had been said to her at the time that there were going to be large sums of inheritance tax to pay she would not have entered into the settlement. But, if someone does not apply his mind to a point at all, it is difficult to say that there has been some real mistake about the point. In response to that difficulty Mr Henderson referred me to Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476. In that case Eve J set aside for mistake a deed of appointment where Lady Hood had forgotten that she had made an earlier appointment; if she had remembered, she would not have made the second appointment. However, I do not think that the Lady Hood case is really comparable. Lady Hood’s intention in making the second appointment had been to put her eldest daughter on an identical footing financially as that in which she had put her youngest daughter. However, the effect of the second appointment, when taken with the first appointment about which Lady Hood had forgotten, was that the eldest daughter became better off. Lady Hood did make an actual mistake in that case. Her mistake was to think, erroneously, that the second appointment was required to produce, and would produce, equality between the two children.

I accept that a borderline between “effect” and “consequences” for the purposes of the law of mistake may not always be easy to draw. Nevertheless, I agree with Davis J in Anker-Petersen that it is tolerably clear what Millett J meant. I also agree with what Davis J said in that case about unforeseen tax consequences not normally providing a ground for setting aside a deed. It is perhaps just possible that a mistake about the resultant tax might count as an operative mistake where tax planning was the objective of a disposition and the person making the disposition made an error of tax law, although I should certainly not be taken as expressing any view about that. But, in any event that is certainly not the present case. Here, the Settlement and Assignment achieved exactly what Mrs Pitt intended they should by way of legal effect. Saving tax was not the point of the transaction, and there was no real error of fact or law.

Since the end of the hearing Mr Henderson has drawn my attention to a decision of a Deputy Deemster in the Isle of Man, Re Betsam Trust [2009] WTLR 1489 given on an uncontested application to set aside a trust. It was a case of unforeseen tax consequences. The Deputy Deemster considered that the test posed by Millett J was “unworkable”: [34]. If the law had remained as it was in 2005, he might have been unwilling to grant the application: [24]. But, in his view the law had moved on such that mere ignorance of a provision of UK tax legislation was sufficient for a trust to be set aside. In coming to this conclusion the Deputy Deemster referred to a number of the same authorities as I have mentioned in this judgment. With respect to the Deputy Deemster, and bearing in mind that he only heard submissions from one party, I do not consider that these authorities lead to the conclusion to which he comes. It is particularly surprising that he should find support for his conclusion even in the observations of Davis J in Anker-Petersen. I must respectfully say that in my view the judgment of the Deputy Deemster does not accord with English law.

I have already expressed the view that there was here no real “mistake” as such. But, if I am wrong about that, I consider that any mistake was, adopting the terminology of Millett J, one of the consequences or advantages, rather than the effect, of the transaction.

In the result, if I had had to decide this case solely on the basis of mistake I would not have upheld the claim. However, fortunately for Mrs Pitt I have concluded that the claim should be upheld under the rule in Hastings-Bass. I will of course hear the parties on any ancillary matters arising from this judgment.