High Court permits recission in EBT case enabling taxpayers to avoid IHT liability

In JTC Employer Solutions Trustee Ltd and others v Garnett and another [2024] EWHC 3128 (Ch), the High Court allowed the claimants' claim and permitted rescission in relation to various Employee Benefit Trust (EBT) appointments to sub-trusts, with the result that there was no IHT liability, as the mistake in creating the sub-trusts was sufficiently serious to render it unconscionable to leave the mistaken disposition uncorrected.

Background

JTC Employer Solutions Trustee Ltd acted as trustee for the 2005 Henderson Family Benefit Trust (HFBT) and the Henderson Group plc Employer Financed Retirement Scheme (EFRBS). The trusts were created to provide benefits to employees, former employees (and their families) of Janus Henderson (formerly the Henderson Group).  

The claimants sought recission of various deeds of appointment, executed pursuant to the HFBT and the EFRBS, which had created sub-trusts for the benefit of individual beneficiaries and their families.

The defendants, Mr Garnett and Mr Sekhon, were representative beneficiaries of the trusts, and did not oppose the relief sought by the claimants.

Under section 86(1), Inheritance Tax Act 1984 (IHTA), trusts for the benefit of employees fall outside the relevant property regime only if the class of beneficiaries represents ‘all or most’ of the employees or office holders (section 86(3)(a), IHTA).  HMRC was of the view that the exemption did not apply.  The claimants therefore applied to the High Court seeking recission of the deeds of appointment on the basis that they had mistakenly believed that: (1) the trusts did not fall within the relevant property regime; and (2) the tax consequences of being within the relevant property regime did not apply. 

HMRC, although not a party to the case, submitted written representations to the Court and objected to the claim. 

High Court judgment 

The Court held that the various deeds of appointment made under the HFBT and the EFRBS should be set aside and allowed the claim. 

In reaching its conclusion, the Court considered the test for recission, as confirmed by the Supreme Court in Pitt v Holt [2013] 2 AC 108 and restated in Kennedy v Kennedy [2014] EWHC 4129, that:

(i)   there must be a distinct mistake as distinguished from mere ignorance or inadvertence; and the court should be open to infer conscious belief or tacit assumption when there is evidence to support such an inference; 

(ii)  a mistake may be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition;

(iii) the causative mistake must be sufficiently grave as to make it unconscionable on the part of the donee to retain the property; and 

(iv) the injustice of leaving a mistaken disposition uncorrected must be evaluated objectively but with an appreciation of the facts of the particular case. 

In terms of the technical tax position, HMRC's position that the sub-trusts did not attract relief as they were not for the benefit of a class of employees and were held for individual employees, was accepted by the Court as being correct.

The Court also accepted that the deeds of appointment were entered into on the basis of an operative mistake as to the fiscal effect of those deeds. That mistake was an incorrect conscious belief, or an incorrect tacit assumption, that the assets appointed under the deeds of appointment, relating to either the HFBT or the EFRBS, would continue to benefit from the treatment in section 86, IHTA, once sub-trust appointments were made. 

In the view of the Court, the evidence suggested that the EBTs in question were not seen as aggressive tax planning and therefore the claimants were not doing anything deliberately risky from a tax planning perspective.

The causative mistake was sufficiently grave to make it unconscionable on the part of the donee to retain the property as there was a significant potential IHT liability of around £7m which may not be met by the claimants and this would create considerable uncertainty, in the absence of a recission order, of where the IHT liability would be borne.

The Court also commented that HMRC could not raise objections on public policy grounds based on prejudice to taxpayers generally, unless it was joined to the claim and provided proper evidence in support of its objections. 

Comment 

The High Court's criticism of HMRC's approach is notable and highlights that HMRC should ensure that it is joined to any similar proceedings if it wishes to make legal submissions to the Court as to why the Court should not order recession. 

The Court's decision also illustrates that, in appropriate circumstances, those who have entered into complex EBT tax planning arrangements on the basis of an operative mistake as to the fiscal effect of those arrangements, should consider bringing a similar claim in the High Court.

The judgment can be viewed here.