The tax compliance burden on professionals involved in private wealth management has never been more onerous. Unsurprisingly, when dealing with complex international wealth structuring involving offshore trusts, mistakes are sometimes made. The question then becomes what to do about them.
The law relating to the ability of the Royal Court of Jersey to set aside transactions involving Jersey trusts that are subject to a mistake was significantly reformed in 2013. This is a very active area for judicial decision making and the Jersey cases are a ‘leading light’ in the continuing development and refinement of the jurisdiction.
The Royal Court can set aside both a transfer of property to a trust and also the exercise of any power over, or in relation to, a trust or trust property if it is satisfied i) that the person making the disposition or exercising the power was acting under a mistake, ii) that but for that mistake the property would not have been transferred or the power exercised, and iii) that the mistake is of so serious a character as to render it just for the court to set it aside.
Since 2013, Jersey has placed the legal mechanism by which transactions involving a trust that are subject to a mistake can be effectively ‘undone’ onto a statutory footing in the form of Articles 47E and 47G Trusts (Jersey) Law 1984.[i]
A qualifying mistake for these purposes is very widely drafted to include a mistake as to the effect or consequences of a transfer of property to a trust, or the exercise of a power over or in relation to a trust or trust property. It can be a mistake of fact or a mistake of law (including foreign law). Unlike English law, Jersey law makes no distinction between mistakes based on incorrect conscious beliefs, incorrect tacit assumptions, or mere causative ignorance.[ii]
The effect of a declaration to set aside a transaction subject to a qualifying mistake is often to treat the impugned transaction as though it had never happened. The position is thus restored to the status quo ante. The court may also declare the transaction to be voided from the time of its having taken place but nonetheless be deemed to have had such effect as the court may determine, or it may declare the transfer to be voided from a date subsequent to the time of its having taken place.[iii] The court’s jurisdiction to set aside is discretionary.[iv]
The questions that have been subject to greater refinement in recent years are i) what is a sufficiently serious mistake to invoke the jurisdiction? ii) what countervailing factors weigh against the exercise of the court’s discretion to set aside? and iii) how far can the court go in setting transactions aside?
What is clear, as the jurisdiction has developed, is that the court will not simply ‘nod-through’ an application that appears to satisfy the test. Close scrutiny will be applied to the facts and to the decision-making that is said to be subject to a mistake that led to the transaction in question.
A ‘Sufficiently Serious’ Mistake
It is well established that a mistake as to tax consequences may amount to a mistake of sufficiently serious character as to render it just for the court to grant relief under Articles 47E and 47G.
While most of the cases are about an actual unexpected tax consequence, it has been held that the risk of a huge tax bill (and not one affecting the settlor or the trust but third parties) may be sufficient.[v]
The issues (a) whether a mistake is sufficiently serious and (b) the causative ‘but for’ test usually go hand in hand and are the most obvious and easily satisfied aspects of an application.[vi] Self-evidently, an application to set aside would not be worth making if the negative tax consequence of what has happened was not significant, and the obvious inference is that had such a negative consequence been anticipated in advance the transaction would not have gone ahead. A mistake would also be of a serious character if the consequence of the mistake is that the trust benefits different people or is of a different nature from that which was intended (e.g. a fixed income trust where the settlor thought it was a discretionary trust, or vice versa).[vii]
Delay And Consequential Orders
There is likely to be a period of time between the impugned transaction and the application in which steps may have been taken which may make it difficult for the court to restore the status quo ante the impugned transaction. A major complicating issue in cases with a long delay is what to do about those intervening actions taken in reliance upon a transaction that is proposed to be ‘undone’.
The fact of a long delay is a factor that will weigh in the discretion. Once a mistake is identified, any delay in bringing an application to put the position right will need to be justified.[viii] The court expects that if a serious mistake has been made, a very prompt application should be made to correct it.
Within statutory limits[ix] the Court can set aside “as a necessary consequence” any transaction made as a consequence of the transaction that is impugned if there is a “sufficient link” between the aforementioned transactions such that they could be treated as “one related transaction”.[x] While the court can ratify or confirm administrative actions of the trustee it cannot ratify or confirm the exercise of dispositive powers taken as a consequence of the transaction that is set aside.[xi]
It remains an open question whether the Court has jurisdiction to set aside decisions of a trustee qua shareholder in relation to a Jersey company on the basis that the shares are trust property.[xii] A declaration that the trustee has taken a step which has no effect within the trust does not necessarily carry with it a declaration as to the validity or otherwise of what a separate entity might have done in the meantime.
Aggressive Tax Avoidance
Most cases involve some form of tax planning gone wrong. The Royal Court has repeatedly stated that where the basis of the application is an ‘artificial’ or ‘aggressive’ tax avoidance scheme, that is a factor in the exercise of the court’s discretion.[xiii] The court has stressed that it will not always come to the rescue of foreign taxpayers who, anxious to avoid meeting their tax obligations, devise a scheme which ultimately does not achieve what was intended.[xiv]
In IFM Corporate Trustees Limited v Helliwell and Ors  JRC 160 at  in a case involving rectification of a trust, the court said this at paragraph 13:
“[…] in an area which involves the exercise of a judicial discretion in cases where the court’s assistance is being sought for a mistake which has been made, there is room for the argument that the discretion ought not to be exercised if on the facts of a particular case, the scheme in question is lawful but appears to be so contrived and artificial that it leaves the court with distaste if, in effect, it is required to endorse it”.
Despite those warnings, the Royal Court has never refused an application to set aside a transaction under its mistake jurisdiction on the basis that it disapproved of any underlying tax planning. In a 2019 decision[xv] the Royal Court set aside a series of transactions by a trustee that had the strong flavour of an attempt at an artificial arrangement designed to avoid tax and reporting obligations. Despite that clearly being part of the factual background, the court’s countervailing concern was the prejudice done to the beneficiaries of the trusts by the transaction:
“the most egregious aspect of it, in our view, is the transferring away of these substantial assets to a circular ownerless set of entities, out of which no distributions could be made to the beneficiaries”.
While the court may make orders as to the validity of transactions vitiated by a mistake (with the effect of avoiding any associated tax consequence), what the court will not engage in is the validation of an entirely different transaction that the applicant wished he had made, which would, had it been undertaken, have given rise to a different and more favourable tax consequence.[xvi] The court will not re-write history.
The vast majority of the Jersey mistake cases are concerned with the avoidance of tax. In determining whether to grant the relief sought, a fundamental part of what the court is doing is a loss allocation exercise. Where the application is rejected, the loss of an unnecessary tax charge lies where it falls; either with the applicant, the beneficiaries, the trustee and/or the relevant tax advisors (by way of an action for deficient or negligent conduct or advice).[xvii] It is a consistent feature of the Jersey cases that the possibility of litigation to recover that loss is not seen as a desirable outcome. As the vast majority of the Jersey applications succeed, the loss invariably falls on the relevant tax authority.
Consider what attitude the domestic tax authorities take to an application that has the effect of reversing a charge to tax. An application, the effect of which is not recognised by the relevant tax authority, is a waste of time. The Royal Court will require the relevant tax authority to be put on notice of the application and allowed an opportunity to comment on it. An application cannot be done in a corner.
Keep an eye to the wider picture. There is a tendency to focus on ‘getting through’ the application to achieve the immediate desired tax consequence. That can be short sighted. Think about how the transaction fits into the wider context. Not only think about what consequential orders might be needed to ‘wind back’ the position to before the mistake but whether there is anything that has happened in the intervening period that cannot be undone and will have to be lived with. Might setting aside a particular transaction solve one problem only to give rise to another? Reversing a settlement into trust by a UK domiciled settlor will avoid the trust being subject to the relevant property regime but it will mean that the assets are treated as still being aggregated in the settlor’s estate and will be taxed on that basis were the settlor to die UK domiciled.
The court’s power to make a declaration without a finding of fault is likely to mean there will be a large measure of consensus between those affected by the application. Applications are undoubtedly more straightforward when the mistake is spotted early, the application is made relatively quickly and there are few, if any, intermediate steps that have been taken as a consequence of the mistake.
[i] There is a parallel jurisdiction, under Article 11 to set aside a trust in its entirety. Many applications will be capable of being brought under both jurisdictions.
[ii] In the Matter of the G Trust  JRC 056
[iii] In the Representation of A  JRC174A at 15
[iv] BNP Paribas Jersey Trust Corporation Limited and Others v Crociani and Others  JCA 136A at 94
[v] In re D,E & F Trusts JRC166C
[vi] Although not always, see In re Piedmont and Riviera Trusts  JRC 210
[vii] In re G Trust  JRC 056
[viii] In Re B Trust JRC035, a delay of a year was said not to work to the benefit of the applicant and was on the ‘margins’ of acceptability.
[ix] Any declaration the court makes cannot prejudice a bona fides purchaser for value of any property affected by the transaction who is without notice of the matters which render the transfer, disposition or exercise of the power voidable.
[x] In Re Z Trust  (1) JLR 132. It has also been a feature of recent Jersey cases that the court is undaunted by setting aside consequential transactions governed by foreign law; A and B v C & Ors  JRC 174A, In re B Trust  JRC 043 and A v B & Ors JRC111
[xi] In re B Trust  JRC043
[xii] Re Rep of A & B  JRC 111
[xiii] In re S and T Trusts  JRC 259, In re J Settlement  JRC 111
[xiv] Ibid In re S & Trusts at 
[xv] In re D and E Trusts JRC246
[xvi] In re B Trust JRC035, In re Grundy Trust JRC071
[xvii] Re Rep of A & B JRC111 this analysis has been extended to include the undesirability of trustees having to sue their professional advisors.
James is a Senior Associate (English Barrister and Jersey Advocate) at Baker & Partners, specialising in trust disputes, fraud & asset recovery and commercial & civil disputes. He has been deemed a "Rising Star" by UK Legal 500 and "Associate to Watch" by Chambers & Partners. Publications include ‘Bust Trusts – Navigating Indemnities, Insolvency & Liability’, June 2019, Jersey and Guernsey Law Review.