Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
CHIEF MASTER MARSH
Between :
A B C | Claimants |
- and – | |
D (by a litigation friend) E (by a litigation friend) F (by a litigation friend) G (as representative of the class of unborn beneficiaries) | First Defendants Second Defendant |
Giles Goodfellow QC (instructed by Clyde & Co LLP) for the Claimants
Edward Waldegrave (instructed by Fladgate LLP) for the First Defendants
Oliver Conolly (instructed by Fladgate LLP) for the Second Defendant
Hearing dates: 12 June and 28 July 2017
Judgment
Chief Master Marsh:
By a claim form issued on the 21 April 2017, the claimants seek relief in connection with two settlements dated respectively 21st of March 2000 and 7 December 2004. On 19 April 2017 Deputy Master Pickering made an order directing that privacy restrictions should be put in place with immediate effect anonymising the identity of the parties to the claim and putting in place reporting restrictions. As a consequence, this judgement will refer to the parties using the convention that is set out in the heading with the claimants referred to as A, B, and C, the first defendants referred to as D, E, F and the second defendant referred to as G.
A and B are the current trustees of the settlement dated 21 March 2000 (“the Childrens’ Trust”). They are, with C, the current trustees of the settlement dated 7 December 2004 (“the M Trust”). I will refer to them together as the Settlements. A was the settlor of the Settlements. D, E and F are his three children. The three children are minors and their mother is their litigation friend. G is joined as a person appointed to represent a class of unborn beneficiaries who may have an interest in the outcome of this litigation. Giles Goodfellow QC appeared at the hearing for the trustees. Edward Waldegrave, instructed by their litigation friend, appeared for the minor children. Oliver Conolly appeared for the unborn children of A. I am grateful to counsel for their assistance and would only add that, although it may not strictly have been necessary for the unborn children to be represented, it was helpful to the court on the hearing of an application, which would otherwise have been unopposed, to receive submissions from their perspective.
The claimants seek relief from the court in the alternative. Their initial claim is by way of construction of the deeds of appointment executed in relation to the Settlements on 10 March 2008 (“the Deeds of Appointment”). In the alternative, the claimants seek an order for the rectification of the Deeds of Appointment on the basis that they failed to implement the intention of the trustees at the time that they were executed. At the material time, the Childrens’ Trust held assets with a value of approximately £2.5 million and the M Trust held assets with a value of approximately £16 million.
The only other point of note by way of introduction is that the third trustee of the M Trust, C, is a solicitor. The firm in which he was a partner in 2008, Fladgate LLP, drafted both Deeds of Appointment and he was involved in the drafting process. It follows that in relation to the M Trust he had a dual role as a trustee and a lawyer implementing the trustees’ instructions whereas in relation to the Childrens’ Trust he only had the latter role.
Background to the Deeds of Appointment
The Settlements were drafted to qualify as accumulation and maintenance trusts (“A&M Trusts”) within the requirements of s.71 of the Inheritance Tax Act 1984 (“IHTA”), as they were at the dates of execution.
Leaving aside differences of terminology, the provisions of the Childrens’ Trust and the M Trust were broadly in the same form. A’s children were the principal beneficiaries in each case. (The defined term for the class of beneficiaries is different in each case but I will use “principal” as a convenient shorthand). At the date of execution of the Childrens’ Trust, only D had been born. By the date of execution of the M Trust, E and F had also been born. The class of principal beneficiaries included any children of the settlor who were born before the trusts closed.
For the purposes of this judgment it is unnecessary to set out the terms of the Settlements in any detail. If suffices to record that they both made provision for the principal beneficiaries to acquire an interest in possession in a share of the trust fund at the age of 25. Each of the principal beneficiaries would become entitled to a life interest in the relevant trust fund contingent on attaining the age of 25. If there were more than one beneficiary, and in default of the trustees exercising a power to vary the presumptive shares, they would benefit equally.
The Settlements, prior to the introduction of the Finance Act 2006 (“FA 2006”), operated under the then tax regime for the purposes of inheritance tax (IHT) in the following way:
Until a principal beneficiary obtained an interest in possession in his or her share of the trust fund, that share would not form part of any individual’s estate for IHT and would not be subject to the “relevant property” regime, which normally applied to settled property which did not form part of a person’s estate. Under the relevant property regime, settled property would be subject to an IHT charge at rates of up to 6% on every tenth anniversary of the settlement – known as the periodic or 10 yearly charge – and to exit charges.
On obtaining an interest in possession in a share of the trust fund, the capital value of that share would be deemed to be part of the principal beneficiary’s estate for IHT purposes. There would be no exit charges as a result of the property ceasing to be held upon non-interest in possession trusts.
The A&M regime was the preferred means of holding assets on trust for beneficiaries up to the age of 25 and beyond prior to the FA 2006 because of the benign tax regime that was applicable.
The budget announcement in March 2006 stated that the special IHT treatment of A&M Trusts would cease to apply after 6 April 2008. This created a period of considerable uncertainty during which the trustees considered the options that were open to them. If no change was made to the trusts prior to 6 April 2008, the settled property would become relevant property and remain relevant property until such time as one or more of the beneficiaries became absolutely entitled to it. During this period the settled property would be subject to IHT charges on each 10th anniversary of the Settlements and subject to exit charges on a beneficiary becoming absolutely entitled - (Sections 64 and 65 IHTA). For the purposes of the rectification claim it will be necessary to consider in some detail the course of the trustees’ deliberations, the advice they received and the manner in which the Deeds of Appointment were prepared and executed.
FA 2006 introduced two new privileged settlements which provided some relief for A&M Trusts:
Conversion into a new A&M Trust. This required one or more beneficiaries to become absolutely entitled to the trust property on or before their 18th birthday.
Conversion into an 18 to 25 Trust in accordance with the requirements of s.71D(3) to (7) of IHTA as amended by FA 2006. If those requirements were met, the settled property would not be relevant property after 5 April 2008 and a special exit rate would be applicable when s.71D ceased to apply.
Alternatively, the trustees could appoint the settled property upon bare trusts for the beneficiaries. This would have the effect of each beneficiary immediately acquiring an absolute equitable interest in the income and capital of his or her share but each beneficiary would not be entitled to call for a transfer of property until the age of 18. The intended effect was that the appointed property would cease to be settled property and therefore be outside the relevant property regime for IHT purposes. But it was subject to the obvious limitation that the beneficiary’s right to control and dispose of the beneficial interest could not be deferred after he or she had attained the age of 18.
To put the Trustees deliberations into their relevant context, as at 6 April 2008 A’s three children would have been aged 8, 6 and 4 respectively.
The Settlements fell within the initial threshold criterion under s.71D(1) because under both settlements property was held on trust for the benefit of persons who had not obtained the age of 25.
The remainder of s.71D, so far as is relevant, provides that:
“(3) Subsection (4) has effect where –
(a) at any time on or after 22 nd March 2006 but before 6 th April 2008 … any property ceases to be property to which section 71 above applies without ceasing to be settled property, and
(b) immediately after the property ceases to be property to which section 71 above applies –
(i) it is held on trusts for the benefit of a person who has not yet attained the age of 25, and
(ii) the trusts secure that the conditions in subsection (6) below are met.
(4) From the time when the property ceases to be property to which section 71 above applies, but subject to subsection (5) below, this section applies to the property (if it would not apply to the property by virtue of subsection (1) above) for so long as –
(a) the property continues to be settled property held on trusts such as are mentioned in subsection (3)(b)(i) above, and
(b) the trusts continue to secure that the conditions in subsection (6) below are met.
…
(6) Those conditions are –
(a) that the person mentioned in subsection (1) (a) or (3)(b)(i) above (“B”), if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to –
(i) the settled property,
(ii) any income arising from it, and
(iii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before that time,
(b) that, for so long as B is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of B, and
(c )that, for long as B is living and under the age of 25, either –
(i) B is entitled to all of the income (if there is any) arising from any of the settled property, or
(ii)no such income may be applied for the benefit of any other person.
(7) For the purposes of this section, trusts are not to be treated as failing to secure that the conditions in subsection (6) are met by reason only of –
(a) the trustees having the powers conferred by section 32 of the Trustee Act 1925 (powers of advancement),
(b) the trustees having those powers but free from, or subject to less restrictive limitation than, the limitation imposed by proviso (a) of subsection (1) of that section,
…
(e )the trustees having powers to the like effect as the powers mentioned in any of paragraphs (a) to (d) above.”
16. Three points of note arise from these provisions:
i. The view taken by HMRC is that where the provisions refer to a “person”, it means a person who is alive at the date when the settled property ceases to be subject to s.71 IHTA. In other words, the new 18 to 25 Trusts cannot be created for a class of persons including persons who may be born after date.
ii. Subsection 71D(6) is explicit that the beneficiary must become absolutely entitled on reaching the age of 25;
Subsection 71D(7) leaves open the possibility that the trusts may include powers of advancement and that such powers will not prevent the new trusts from qualifying as 18 to 25 Trusts. A power to advance may be used to postpone the vesting of an interest – Pilkington v IRC [1964] 1 Ch 612, at 633,636 per Viscount Radcliffe.
Deeds of Appointment
The scope of the powers exercised under the Settlements were similar. The Deeds of Appointment were executed on the same date and they are in materially identical terms. Where the Deeds of Appointment differ, it is due to the difference of expression contained in the original settlements; for example the use of “Principal Beneficiaries” in one settlement and “Primary Beneficiaries” in the other. Importantly, both Deeds of Appointment exercise the powers of the trustees in favour of the class of beneficiaries, rather than the three children of A then alive.
Clause 2 of the deeds of appointment provided:
“2 Appointment
In exercise of the power of appointment given to the [trustees] in clause [xx] of the Settlement and all other relevant powers the [trustees] hereby revocably appoint and declare that the Trust Fund shall from the date of this Deed be held by the Trustees upon the trusts powers and provisions contained in clauses 3 to 7.” [my emphasis]
In passing, I note that in the Deeds of Appointment there is an obvious typographical error in referring to the clause number in the original settlement of the power of appointment. The Deeds of Appointment also do not expressly acknowledge or cater for the fact that A was appointed as the Protector of the Settlements and his consent was required to the exercise of the powers they contain. However, he is a signatory to Deeds of Appointment in his capacity as a trustee and he does not contend, nor could he realistically do so, that he does not consent. It is plain that his consent is implicit and the absence of an express recital to that effect is immaterial. It is unnecessary to dwell on those errors which of themselves would not have warranted the making of an application to the court. The use of the word “revocably”, however, is of much greater difficulty, a point to which I will return.
The terms of clauses 3 to 7 of the Deeds of Appointment are unremarkable. Clause 3 creates what are termed the “Principal Trusts” which have the effect of vesting the Trust Fund for such of the class of beneficiaries as shall attain the age of 25. Clause 4 makes provision for the operation of the trusts for the beneficiaries under the age of 25 and clause 5 creates an extended power of maintenance. Clause 7 saves the provisions of the original settlements so far as they are consistent with the Deeds of Appointment.
Clause 6 contains a saving provision that is material to the case on construction:
“6. Restrictions on certain powers
6.1 In this clause qualifying property means any part of the Trust Fund which is for the time being property to which section 71D of the Inheritance Tax Act 1984 applies.
6.2 Where the Trust Fund or any part of it would (in the absence of the restrictions imposed by this clause 6.2) fail to be qualifying property by reason only of powers conferred on the Trustees by the Settlement, this Deed or by law, those powers shall be capable of being exercised only in a manner which does not prevent the Trust Fund or that part of it from being qualifying property.”
22. As I have indicated, it is the use of the “revocable” that creates difficulty for the trustees. If it is the case that the Deeds of Appointment can be revoked, and the trustees choose to exercise that power, the trust property would be held on the trusts that applied under the original settlements. Even if the trustees do not exercise that power, there is a real likelihood HMRC will not accept that the trusts as amended by the exercise of the trustees’ powers qualify as 18 to 25 Trusts which will have very significant adverse fiscal consequences. The trustees submit that the court can properly construe the Deeds of Appointment by applying the provisions in clause 6 so as to, in effect, enable “revocably” to be read as “irrevocably”. In the alternative, they seek to obtain the same outcome by rectification.
23. The trustees recognise that it is not open to the court to construe the Deeds of Appointment in such a way that will cure what is said to be the defect arising from the creation of new trusts for a class of beneficiaries, rather than the three children then living. That outcome can only be achieved by rectification.
24. HMRC has been notified of these proceedings and has provided a conventional response saying that it does not wish to be joined as party to the claim and noting that the claimants intend to draw to the attention of the court Racal Group Services Ltd v Ashmore (1995) STC 1151 and Allnut v Wilding [2007] EWCA Civ 412.
25. So far as rectification is concerned, a convenient summary of the law can be found in the judgment of Barling J in Giles v The Royal National Institute for the Blind & others [2014] EWHC 1373 (Ch) [25] where he analysed the Court of Appeal’s decision in Racal Group Services v Ashmore:
“(1) While equity has power to rectify a written instrument so that it accords with the true intention of its maker, as a discretionary remedy rectification is to be treated with caution. One aspect of that caution is that the claimant's case should be established by clear evidence of the true intention to which effect has not been given in the instrument. Such proof is on the civil standard of balance of probability. But as the alleged true intention of necessity contradicts the written instrument, there must be convincing proof to counteract the evidence of a different intention represented by the document itself (1154h-1155b);
(2) There must be a flaw in the written document such that it does not give effect to the parties'/donor's agreement/intention, as opposed to the parties/donor merely being mistaken as to the consequences of what they have agreed/intended; for example, it is not sufficient merely that the document fails to achieve the desired fiscal objective (1158f-g);
(3) The specific intention of the parties/donor must be shown; it is not sufficient to show that the parties did not intend what was recorded; they also have to show what they did intend, with some degree of precision (1158g-j);
(4) There must be an issue capable of being contested between the parties notwithstanding that all relevant parties consent. This criterion has been much criticised: the purpose of it, and its actual content and scope, are by no means clear. In Racal Peter Gibson LJ expressly approved the following summary of the principle by Vinelott J in the same case. Vinelott J stated that the court must be satisfied:
“that there is an issue capable of being contested, between the parties or between a covenantor or a grantor and the person he intended to benefit, it being irrelevant first that rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences. On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.” (1155c-1158b).”
26. Reference was also made to the judgment of Mummery LJ in Allnutt v Wilding at [11] where he said 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.”
27. It is now clear from the decision of the Court of Appeal in Day v Day [2013] EWCA Civ 280 that in the case of voluntary transactions, such as the Deeds of Appointment, the relevant test is whether the document gives effect to the subjective intention of the maker of the voluntary disposition and there is no legal requirement for there to be any outward expression or objective communication of the settlor’s intentions. Thus, an uncommunicated subjective intention is sufficient in the case of a voluntary settlement and it must follow that evidence of subjective intention is admissible. The court in this case is seeking to establish the subjective intentions of the trustees and is entitled to receive and take account of their evidence about what their intentions were when executing the Deeds of Appointment. However, a note of caution must be sounded because C, the solicitor, was only a trustee of the M Trust.
28. The parties have provided the court with a substantial amount of evidence setting out the circumstances in which the Deeds of Appointment were executed in 2008 and the intentions of the trustees. A, B and C have each made three witness statements. In the case of C, his evidence deals, in addition to his role as a trustee of the M Trust, with his role as the partner supervising NW, the solicitor in Fladgates’ non-contentious private client team who was the principal draftsman of the deeds. In addition, JT and AT who are both private client partners with HW Fisher which acted at the time as accountants to the trusts.
29. During the initial hearing on 12 June 2017 it was realised that the scope of the claim to rectification needed to be extended to include the point concerning the exercise of the powers of appointment in favour of the class of beneficiaries rather than D, E and F as the living children of A at the time. This necessitated an adjournment of the hearing and further evidence from the trustees.
30. One of the difficulties facing the court dealing with a combined application to resolve an issue of construction, with a claim for rectification in the alternative, is the mental gymnastics that are required to ensure the evidence of subjective intent is disregarded when dealing with the issue of construction. In practice, it is sometimes more satisfactory for the court to adopt an approach that may at first seem to be counter-intuitive, namely to deal with the claim for rectification first; that is unless the issue of construction, if resolved in favour of the claimant, would resolve the whole claim and its merits are obvious. If, as here, the issue of construction involves the court concluding that “revocably” means irrevocably in the context of the Deeds of Appointment, and in any event does not resolve the claim, the practical approach is to deal with the claim for rectification first. That is what I propose to do.
31. None of the evidence has been tested and it follows that it must be regarded with a degree of caution given it is implicit from the nature of the claim that errors have occurred and there is a real likelihood of substantial sums of IHT being payable, with interest and, possibly, penalties, if the claim is unsuccessful. Both the lawyers and the accountants who were involved have a very real interest in what are said to be the defects in the drafting being resolved. That is not to suggest any of the witnesses are doing other than trying to assist the court but it is appropriate given the cogency of the evidence that is required to found an application for rectification for the court to bear the interests of the deponents in mind where they speak of their intentions or those of the trustees.
32. The Claimants seek to establish four elements from the evidence they have put forward namely that the trustees intended that:
i the trusts created by the appointment would satisfy the requirements of s71D and that they had sufficient understanding of what those requirements were.
ii A’s children would become entitled to their share of the trust capital if they attained the age of 25.
iii any deferral of a child’s entitlement to capital should be made pursuant to a power of advancement or appointment exercised for the benefit of that child and not by revoking the earlier appointment.
iv the capital and income should be appointed for the benefit of D, E and F in fixed equal shares and not appointed for a class of beneficiaries that had not closed.
33. Consideration of the changes announced in the April 2006 budget statement commenced immediately with an associate at the law firm in which C was then a partner summarising the anticipated impact to the IHT treatment and providing a short analysis of what steps might be taken. He correctly identified that the trusts could be re-arranged so that the capital vested in A’s children absolutely at the age of 25 but suggested that no action was taken immediately with a review in mid-2007.
34. At the trustees’ meeting in June 2006 consideration was given to creating bare trusts but it is clear that by November 2006 this idea no longer had any attraction and was not considered any further. In the intervening period, in October 2006, C considered the position both with the associate who had provided initial advice in April 2006 and with AT. On 12 October 2006, AT sought advice from C about whether s71D could be used asking whether this was technically possible under the terms of the settlements. He went on to ask C:
“What about going the 71D route, whereby before 2008 the children are given the right to the capital at 25? Would this then ‘eliminate’ the ten year charges in 2014. [D] will be 25 in 2024.
Then, say in 2023 ‘we’ review the position. If [A] is then happy for [D] to get (a third) of the fund, then fine – we will have the 4.2% charge on her fund (but will have avoided the 3.9% charge in 2014 and the 6% charge in 2024). If [A] is not happy for [D] to get the funds, then the Trustees revoke her interest and we revert to the relevant property regime and get the 4.2% charge in 2024 – but would still have eliminated the ten year charges.
…
I appreciate that the children have to be given ‘fixed’ interests.”
35. This advice was considered by C’s associate. Interestingly, he did not comment on the use by AT of the word “revoke”. He clearly understood the notion of revocation to be a deferral and he expressed doubts about whether such an approach would be within the spirit of s71D. In any event, the possibility of using s71D that had been highlighted by AT was considered at the trustees’ meeting on 17 October 2006 without a firm decision being taken at that stage. It is clear, however, that AT’s advice was based from the outset upon the premise that the beneficiaries under the arrangement would be A’s three children then living and they would benefit equally obtaining an equal share of capital and income. However, the unfortunate use of the word “revoke” became embedded within the advice and was used on future occasions by AT. I observe it is surprising that the notion of revocation should have been mentioned at all without being corrected. It is an ordinary word and not one that could obviously be muddled with deferral, particularly when used by a tax specialist such as AT.
36. AT wrote to A on 24 November 2006. He identified that under the Settlements unaffected by the FA 2006, the children only had a right to receive income at the age of 25 and there were no IHT charges until a beneficiary died over the age of 25. Under the new regime, the trustees would be liable to pay IHT on the 10-year anniversaries of the Settlements. He estimated that the tax charge on the M Trust in 2014 would be in the region of £1 million and the next charge in 2014 would be in the region of £2.4 million. He put forward two options with option A described in the following way:
“1. Change the terms such that the beneficiaries become entitled to a fixed share of capital (say equally) at the age of 25.
2. This will eliminate the £1 million 2014 charge.
3. Then just before the beneficiary([D]) becomes 25, we would discuss the position with you. The trustees could either
i) Do nothing, and then [D] would become entitled to her (1/3) share of the capital. IHT would be payable at 4.2%. The tax would be say £40 million x 1/3 at 4.2%, £560,000 instead of the £2.4 million mentioned above. There would then be 4.2% charges in 20026 [sic] [E] and 2029 [F]. Or
ii) Revoke the beneficiary’s interest, such that the trust reverts to the terms as they are today. The tax would be as in (i) above and there would be the ongoing 10-year charges.” [AT’s emphasis – both the underlining and enboldening]
37. It is clear that the general scheme of this advice seeks to take advantage of s71D. The tax calculations are consistent with 18 to 25 Trusts being created with each of the three children receiving fixed interests in capital and income at the age of 25. The use of the word “revoke” is again unhelpful but it is reasonably clear that AT was not intending to mean that the trustees, having considered the position of each child shortly before the age of 25, should be entitled to revoke the trusts because, amongst other reasons, no consideration is given to who else might benefit from the revocation. And a revocation of the appointment would be inconsistent with the tax advice that is given. In the event, the letter was not considered at the meeting of trustees on 11 December 2006. The minutes record that it would be considered at a later stage.
38. On 29 June 2007 a guidance note prepared by the Society of Trust and Estate Practitioners (STEP) and the Chartered Institute of Taxation (CET) concerning, amongst other things s71D, was issued. The guidance had been agreed with HMRC. It was read by C and possibly the accountant advisers. Crucially the guidance included the following paragraph:
“3.1 HMRC accept that the mere possibility of a power of advancement being used to defer entitlement to capital at … 25 does not cause the trust to fail to satisfy the requirements of … s71D given the terms of … s71D(7) … If the power of advancement is exercised in favour of that person so as to create continuing trusts under which the beneficiary’s capital entitlement will be deferred beyond the age of … 25 … those trusts will fall within the relevant property regime (with …. the usual exit charge under s71E, computed according to the provisions in s71F, assuming the proper exercise of the power causes property to be “paid or applied for the advancement or benefit of B”; otherwise the computation would be under s.71G).”
39. On 17 July 2007 JT sent to A, B and C a briefing note prepared by Withers LLP to similar effect. The trustees met the following day to review both trusts. The minutes of the meeting relating to the Childrens’ Trust (attended by C) record JT’s advice and again refer to the possibility that the children’s interests could be revoked just before they attained the age of 25. By now, if there had been any doubt, it is clear JT was not using the word revoke in its conventional sense because the advice is given expressly in the context of the recent guidance by HMRC. C confirmed that HMRC had no objection to “this arrangement” which could only sensibly mean the arrangement to use the power to advance to defer entitlement. It is also clear from the minutes that the trustees were considering the position of “the children” meaning the children of A then living, not the class which could have included unborn children because it refers to each of the children having a 1/3 share.
40. The minutes of the meeting relating to the M Trust are in slightly different terms but the meaning is equally clear.
41. The proposals were included in the agenda for a meeting of the trustees on 18 December 2007. However, due the volume of other business on the agenda, the proposals concerning the Settlements was left over until the adjourned meeting on 10 January 2008. C did not attend that meeting. The minutes show that AT made a similar presentation to the one he provided in July 2007. The letter dated 24 November 2006 was considered. The minutes record the proposal was to give “… the children a right to trust assets at age 25.” Read in the context of the additional evidence provided by A, that he had had a vasectomy, a fact of which his fellow trustees were aware, the reference to “children” can only mean his three children who were then living. The language used about the children having a right to trust assets is consistent with the creation of 18 to 25 Trusts. However, the minutes go on to record:
“AT stressed that it is not entirely certain that one will be able to revoke many years hence but there should be no reason why this should not still be the case – particularly as this is a trust rather than a tax matter.
On this basis the trustees – subject to [C’s] agreement – have decided to proceed.
The trustees instructed AT to write to [C] at Fladgate Fielder and asked him [sic] to draw up the relevant documentation.”
42. Once again “revoke” is used but doubt is expressed about whether it will be possible to revoke. The choice of language is very unfortunate. However, read in the context of the evidence from all the witnesses, it is clear that the trustees were not intending to reserve to themselves the power to revoke the new trusts. They had determined that they wished to create new 18 to 25 Trusts within the requirements of s71D of FA 2006. To my mind, the position gelled at the meeting of trustees in July 2007 and their intention to create compliant 18 to 25 Trusts did not change. The decision was made in light of the STEP guidance and the Withers note about the ability of the trustees to defer the entitlement to capital using the power of advancement. Although in other circumstances it would not be obvious to read “defer” for “revoke”, that was what the trustees had in mind. Some support for this can be found in the remark recorded in the minutes that there was doubt about the ability to revoke and it was a trust rather than a tax matter. It is right that a decision to defer the entitlement of a child to capital could only be made taking in to account all the relevant circumstances in the exercise of the trustees’ discretion. It was not possible to be certain many years in advance of the children reaching the age of 25 whether it would be appropriate to exercise that discretion accordingly.
43. Unfortunately, the next stages, following the meeting on 10 January 2008, were as unsatisfactory as the loose use of language in the explanations given to the trustees. On 16 January 2008 AT sent a brief email to C providing instructions to draft deeds of appointment:
“At the recent meeting here with [A] and [B], [A] confirmed that he would like to proceed with the 71D Plan, whereby the beneficiaries of The Children’s Trust and The [M] Trust are, before 5 April 2008, given revocable interests in the capital at age 25.
You will recall that this is with a view to mitigating the ten year charges on such trusts introduced in FA 2006.
If you agree, as trustee, where applicable, could you please draft suitable Deeds for consideration.”
44. The instruction was to draft trusts that were compliant with s71D. However, the instructions were unhelpful in three important respects. First, the email refers to the beneficiaries of the two trusts rather than the three children by name. Secondly, the instructions conflate two separate steps; the grant of a right to the capital at the age of 25 and the ability to defer that entitlement using, where appropriate, the powers of advancement. Thirdly, the description of the interests as being revocable created confusion. The unfortunate draftsman of the deeds, NW, was given less assistance in the instructions from AT than might have been expected and the manner in which internal instructions were given to her within Fladgate was also less than ideal. All that happened was that C forwarded the email to a legal executive who then forwarded it to NW and provided her with the original settlements. Thus a ‘perfect storm’ was set in motion aided by a lack of relevant experience on the part of NW, ambiguous instructions and a supervising partner who lacked the time to give adequate consideration to the drafting. It is no part of a claim to rectification to apportion blame for the errors that are sought to be rectified. It is, however, relevant for the court to be able to understand how the errors occurred; and here, the ‘perfect storm’ was an environment in which there was a strong likelihood of errors being made.
45. In her evidence, NW says she understood the A&M trusts were to be converted to s71D trusts but was unsure about whether the interests should be expressed as being revocable or irrevocable. After waxing and waning on this issue, and producing for herself drafts in different forms, she settled on ‘irrevocable’ in the draft she presented to C for comment.
46. NW drafted the deeds using the text in Practical Trust Precedents (PTP) for the conversion of an A&M Trust to an 18 to 25 Trust. The precedent provides drafting notes to the effect the beneficiaries must be identified in accordance with HMRC’s current guidance but this part of the precedent was either overlooked or the instructions from AT were followed too slavishly. The Deeds of Appointment each refer to the definition of beneficiaries in the Settlements leaving open the possibility that children then unborn might benefit.
47. C was provided with drafts on 13 February 2008 and in a brief email NW told him she had followed the PTP precedent. C then marked up the drafts in manuscript and noted on the cover: “Let’s chat”. His marking included ringing the word “irrevocable” as something to discuss with NW. Neither he nor NW has a clear recollection about why the change from “irrevocable” to “revocable” was made as the drafts progressed or why it remained in the Deeds of Appointment when they were finalised. In any event, on 21 February 2008, revised drafts were sent by email by NW to C noting that the appointments were revocable “as instructed”. However, the remainder of her email points strongly to a continuing intention to create new 18 to 25 Trusts in accordance with s71D. C was unable to open the drafts that were attached to the email but said they should be sent on to JT for comment. They were then sent by NW to JT on 21 February 2008 saying she trusted that they do what is required “… and convert the settlements into 18 – 25 trusts.” JT declined to comment on the basis that the client did not wish to be charged twice for the work. On 4 March 2008 NW sent a further email to JT saying:
“Just to clarify then as I was not a party to the original discussions, the appointments are to create new 18-25 s71d trusts for the [M] and Children’s trusts, which it is intended to revoke just before each child reaches the age of 25. This mitigates the ten year charges that would otherwise arise prior to the children attaining the age of 25.”
48. This elicited a cautious response from JT who said he believed what she said was correct. Finally, on 5 March 2008, NW sent an email to the three trustees and JT asking for instructions about the arrangements for execution. In this email, her message lacks the clarity of the email sent to JT the day before. She said:
“Following the decision made at the last trustees meeting to revocably appoint out the interests in the above settlements onto new trusts in line with the new trust legislation introduced by the Finance Act 2006, which will mitigate the inheritance tax charges that would otherwise arise. I have completed the relevant documentation and now all that is required prior to 5 April 2008 is your execution of the same as trustees.”
49. The way she expresses the position in this email is unfortunate and it appears she had by them become infected, seemingly like all the other professionals involved, with a very loose understanding of the notion of revocability. If the intention was to create valid 18 to 25 Trusts that complied with the provisions of s71D, the trusts could not be revocable. In any event, the deeds were then executed by the trustees.
50. In a claim for rectification it is permissible to take into account events that follow on from the execution of the document that a party seeks to rectify. There are two documents here that lend support to the claimants’ case. First, in an email dated 24 May 2010 from C to A and B he notes that the new trusts contain a power “… to postpone the children taking an absolute share in the trust by using the powers available to the trustees …”. This use of language is quite different to the notion of the trusts being revoked. Secondly, in his letter of wishes signed on the same date, A explains that originally “our children” were due to receive the income when they attained 25 but that both trusts were changed to qualify as 18 to 25 Trusts. He goes on to say that:
“The children are due to take their share of the capital of the trust outright at age 25.” [His emphasis]
51. I now return to consider whether the four propositions set out at paragraph 32 are satisfied to the high standard that is required for a claim seeking rectification. I have not referred in detail to the evidence from the witnesses in this judgment, but the written records to which I have made reference, taken with the witness evidence, show that A and B formed a settled intention to create new 18 to 25 Trusts that were compliant with s71D at their meeting in January 2008 and held that intention through to the execution of the two deeds. They thought they were executing documents that gave effect to their instructions. It is understandable they would not have dwelt on the use of the word revocable or that the beneficiaries were defined by a class rather than naming the three children.
52. It seems to me that the defining moment so far as the trustees’ intentions were concerned was the publication and consideration of the joint STEP/CIT guidance note that was the product of discussions with HMRC. In July 2007, the trustees were able to appreciate that the creation of new 18 to 25 Trusts could leave the trustees with rather more flexibility than was apparent from the bare provisions of s71D. Although the choice of language used by the advisers was curious, the intention was to create s.71D trusts and the trustees understood that involved the children obtaining an entitlement to their share of the trust fund at the age of 25, subject to the trustees’ ability to defer receipt of that entitlement if they thought that was right. The deferral was to be by way of the exercise of a power of appointment. And there is no doubt that in the minds of the trustees, it was only ever A’s three children, D, E and F, who were intended to be the beneficiaries of the new trusts.
53. The position in relation to the M Trust, however, is less straightforward than that of the Childrens’ Trust because of C’s involvement both as a trustee and a solicitor dealing with drafting the deeds. His state of mind, qua trustee, is important. He says in his evidence that he was very busy in February 2008 and it had been more than 6 months since he had attended a trustees’ meeting. He did not attend the meeting of trustees held in January 2008 and the decision taken at that meeting was, in relation to the Childrens’ Trust, subject to his approval. If it were essential to look for some outward manifestation of his intention as trustee between January 2008 and the date of execution of the deeds (which it is not) there might be real difficulty due to what can fairly be described as the muddled process of drafting the deeds. But his understanding of the position as he had wished it to be does becomes clear from the email he sent after their execution. And he says in his evidence, and I accept, he understood what was required for an 18 to 25 Trust and that the appointment of capital to the beneficiaries would need to be absolute and irrevocable.
54. It seems to me it is right to distinguish the two roles performed by C and to consider for the purposes of the claim to rectification his state of mind qua trustee. His state of mind qua solicitor seems to have lacked focus and concentration but there is nothing in what he did, or did not do, in that capacity which negates, or renders illusory, the underlying intention to create valid 18 to 25 Trusts. He clearly understood, as an experienced private client lawyer, that it was essential for the children to obtain vested interests at the age of 25 and his complicity in the use of “revocable” rather than “irrevocable” is the product of carelessness rather than considered thought. His role qua solicitor can be seen as being ministerial, rather than a role that entirely overlaps with his role as a trustee. In any event, a lack of focus or, put more unkindly, carelessness, in performing the role as solicitor are unrelated to his role as trustee.
55. It follows that, in relation to both trusts, I am satisfied that both elements of the claim to rectification are made out. Although fiscal considerations lie behind this claim, its focus is on the failure of the lawyers acting for the trustees to implement their instructions in a satisfactory way. It is quite unlike Allnutt v Wilding in which the settlor had no more than a general intention to save IHT on his death, without making direct gifts to his children, and only a general intention to benefit them through the medium of a settlement and a PET. It was not possible in that case to identify more specific instructions and intentions than that. Here, by contrast, although the trustees had the fiscal benefits of creating 18 to 25 Trusts in mind, they intended to create new trusts of a specific type that satisfied the requirements of s71D by the exercise of the powers of appointment.
56. It follows that it is unnecessary for me to consider the case on construction about which I make no comment.
57. I will make the order sought by the claimants following the handing down of this judgment which will take place in the absence of the parties.