As published on step.org/industry-news, Monday 22 May, 2023.
The England and Wales Court of Appeal (EWCA) has rejected a request from the beneficiaries of an offshore trust to set aside a voluntary disposition of assets on the ground of mistake.
The beneficiaries were members of the Bhaur family, who had built up a substantial property business over several decades. In 2006, they were sold an inheritance tax (IHT) avoidance scheme marketed as an 'Asset Liberation Solution'. It involved placing the business assets into a new company called Safe Investments UK, with the family members as employees, directors and shareholders. Safe Investments UK then transferred the assets to a newly created wholly owned offshore subsidiary called Gooch Investments. To complete the scheme, in March 2007, Safe Investments transferred its shares in Gooch to a BVI trust company, Equity Trust (BVI) Limited. The shares were to be held on the terms of an employee remuneration settlement for the benefit of qualifying employees of Safe Investments: in particular, the children of Mr and Mrs Amarjit Bhaur. As the children could not could not benefit from the trust capital while their parents were still alive, but this meant they could do so after their parents' deaths, free of IHT.
However, HMRC challenged the scheme in July 2010, contending that the disposals by Safe Investments UK did not qualify for the relevant tax exemption because of the possibility that the Bhaur children might eventually benefit from the trust. That dispute and the tax consequences for the Bhaurs has not formally been resolved. However, if HMRC succeeds, the effect will very likely be 'seriously disadvantageous tax consequences' for them, as well as the loss of any IHT benefits.
The Bhaurs are thus seeking to have the transfers into trust reversed on the grounds of trustee mistake: that 'the solution was unsuitable [for them] and the representations [by Aston Court that it was suitable for them] were false'. Their application was rejected at first instance in 2021, with Smith J concluding that the Bhaur family (or, at least, Mr Bhaur) understood what they were getting from the scheme and were not mistaken about its nature at the time but simply mispredicted the adverse consequences.
The family appealed on four closely related grounds, but the EWCA has now unanimously rejected their appeal. Giving the unanimous ruling, Snowden LJ said it was of 'considerable weight that the Scheme was, on any objective view of the facts, an entirely artificial tax avoidance scheme ... I fully accept that tax avoidance is not unlawful, but I agree with Lord Walker's observations in Pitt v Holt … that artificial tax avoidance is a social evil that puts an unfair burden on the shoulders of those who do not adopt such measures. In my view this is a very weighty factor against the grant of any relief.' (Bhaur v Equity First Trustees (Nevis), 2023 EWCA Civ 534).
The consequence of the EWCA's judgment for the Bhaurs, said Snowden, could be very serious indeed, given the further complications that have ensued in the intervening years (not covered in this summary). They may be left with large tax liabilities and no assets with which to satisfy them, he said.