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Jersey Royal Court Clarifies And Affirms The Jersey Test For Rectification – Capital Gains Tax



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In the recent decision of The Representation of Vistra
Fiduciary Limited
 [2022] JRC 164, the Royal Court moved
away from the Court of Appeal’s preferred test for
rectification of a trust instrument set out in B&C v
Virtue Trustees (Switzerland) AG
 [2018] JCA 219, and
reaffirmed the well-established three stage test
in Walbrook Trustees v Amethyst Trust [2002] JRC
186 and R.E. Sesemann Will Trust [2005] JLR 421.
In doing so, the Royal Court considered that it was not “bound
by the propositions of law” referred to by the Court of Appeal
as they were not the subject of argument by the parties before the
court. 

This is a significant decision for trust practitioners to be
aware of, and a salutary reminder to ensure that a trust instrument
aligns with the intention of the Settlor. It is also a rare example
of the Royal Court moving away from a decision by the Court of
Appeal. 

Background to Vistra Fiduciary
Limited
 [2022] JRC 164

The case concerned an application by Vistra Fiduciary Limited,
the Trustee of a discretionary trust called the Maria Trust, to
rectify the trust instrument to specifically add the Settlor to the
definition of “Excluded Person”. This was to ensure that
the Settlor was expressly excluded as being a potential beneficiary
under the trust for the purposes of legitimately avoiding
inheritance tax.

The Settlor’s son, F, in 2008 wished to buy a property in
the UK for him and his family to live in. F’s father (the
Settlor’s husband) was suffering from terminal cancer in 2009
and the Settlor and her husband wanted to assist their son to
purchase a property. Unfortunately, the Settlor’s husband
passed away before the property purchase took place.

F took tax advice from HMG Law as to whether he should purchase
the property in his own name or via a trust. The advice from HMG
was clear that an offshore discretionary trust was the best way
forward to mitigate inheritance and capital gains tax. HMG Law
reached out to the Trustee regarding the establishment of the Maria
Trust. The purpose of setting up the trust was clearly recorded in
an e-mail from the Trustee to HMG, which stated: “The Trust
will be discretionary which will acquire/hold a UK residence as its
principal asset to be occupied by the principal beneficiary for the
purposes of inheritance tax and capital gains planning.”

The Trustee provided a draft trust instrument to HMG Law for
review, which was approved. The Maria Trust was established by the
Settlor, with F, his wife and issue as the beneficiaries, G as a
protector and the Trustee named as the only excluded person.
However, there was no mention of the Settlor being excluded. The UK
property was purchased using funds derived from a Panamanian
Holding Company (wholly owned by the settlor) and held on trust for
F and his family.

In November 2016, upon receipt of further tax advice from
Charles Russell Speechlys (CSR), it transpired
that there was a risk that the trust assets could be subject to
inheritance tax, as the Settlor could be added as a beneficiary of
the Maria Trust. The firm advice from CSR was that in order to
mitigate that risk, the Settlor had to be expressly excluded as a
beneficiary of the Maria Trust. Consequently, an instrument of
exclusion was purportedly executed on 5 May 2017 by the Trustee
pursuant to clause 9 of the trust instrument. However, the
instrument of exclusion was likely to be invalid as the consent of
the protector, G, had not been sought nor obtained at the time.

The Settlor passed away in February 2019. Further tax advice was
received from CSR regarding the inheritance tax issues. CSR advised
that there was an inheritance tax liability and further advised
that the present application for rectification of the trust
instrument to include the Settlor within the definition of
“Excluded Person” would result in the elimination of that
liability.

An application for rectification of the trust instrument was
brought before the Royal Court. The Royal Court considered the
cogent evidence available from 2008 in relation to the intention of
the Settlor at the time the Maria Trust was established, including
the affidavit evidence from inter alios, F, G, and HMG Law.

The test for rectification of a trust instrument

The Royal Court set out the well-established three stage test
for rectification in Walbrook Trustees v Amethyst
Trust
 [2002] JRC 186 and R.E. Sesemann Will
Trust
 [2005] JLR 421. The latter case sets out the test
as follows:

“12. The test for rectification in Jersey is well
established. There are three requirements:

  1. the court must be satisfied by sufficient evidence that a
    genuine mistake has been made so that the document does not carry
    out the true intention of the party(ies)

  2. there must be full and frank disclosure

  3. there should be no other practical remedy. The remedy of
    rectification remains a discretionary remedy

“13. The important aspect in this case is whether the first
requirement is met. There is a clear distinction to be drawn
between the transaction itself and the objective behind the
transaction. The court can rectify a deed which does not reflect
the transaction which the parties intended to achieve but the court
cannot use rectification as a method of allowing the parties to
achieve some other transaction which, in hindsight, would have been
more desirable”

The Royal Court explained that it was required to apply the
civil standard of proof to the question of rectification, and
therefore it was to determine whether on “the balance of
probabilities”  there is sufficient evidence that a
“mistake has been made so the document does not carry out the
true intention of the relevant parties.”

The Royal Court however was cognisant of the Court of Appeal
decision in B & C v Virtue Trustees (Switzerland)
AG
 [2018] JCA 219 (B&C).
In B&C the Court of Appeal preferred the
test for rectification as formulated in Lewin at paragraph 4-069,
with a number of additions.

“The conditions which must be satisfied in order for the
court to order rectification of a voluntary settlement are as
follows:

“1. there must be convincing proof to counteract the
evidence of a different intention represented by the document
itself

“2. there must be a flaw (that is an operative mistake) in
the written document such that it does not, on its true
construction, give effect to the Settlor’s intention

“3. the specific intention of the Settlor must be shown; it
is not sufficient to show that the Settlor did not intend what was
recorded; it must also be shown what they did intend; and

“4. there must be an issue capable of being contested
between the parties affected by the mistake notwithstanding that
all relevant parties consent

“To these requirements I would add that there must be full
and frank disclosure; that no other remedy is available to achieve
the same end; and that even when the requirements for rectification
are satisfied the court retains a discretion whether or not to
rectify.” (The reformulated test.)

Interestingly, the Court of Appeal, without hearing argument
from the parties, determined that:

“It seems to me clear, both from the reference
in Re Smouha to the English cases having been
taken into account in the formulation of the Jersey requirements
and from the equivalence in substance of the relevant requirements
in Jersey and England, that there is no difference between the law
of England and the law of Jersey relating to the rectification of
voluntary settlements. In my judgment, the first requirement set
out in R.E. Sesemann Will Trust  is too
summarily expressed; and I prefer, and would adopt, the formulation
set out in paragraph 4-069 of Lewin, with the additions I have
identified in paragraph 22 above.”

The Royal Court referred to the case of Murray v
Camerons Limited
 [2020] JRC 179, as authority that it was
not to be bound by the Court of Appeal’s decision
in B&C, to adopt the reformulated test because
the point on which the Court of Appeal proceeded was not argued
before it. The Royal Court was of the view that the two tests
although similar in parts were also sufficiently different.
Specifically, the Royal Court was also reluctant to adopt the
reformulated test where part four of the reformulated test,
“an issue being capable of being contested”, had proved
problematic for the English Courts and had been subject to
criticism.  

The Royal Court therefore clarified and affirmed that the test
to be applied was the three stage test as established
in Walbrook Trustees v Amethyst Trust [2002] JRC
186 and R.E. Sesemann Will Trust [2005] JLR 421.
In applying the three stage test, the Royal Court approved the
rectification of the Maria Trust to exclude the Settlor as a
beneficiary.

Conclusion

Although the Royal Court gives deference to and usually follows
the law determined by the Court of Appeal, there are clearly
exceptions to that practice in appropriate cases such as this. It
is acknowledged that often the Royal Court also has regard to
English case law and texts such as Lewin when determining
applications concerning Jersey trusts. However, Jersey does have
its own identity and has taken a different approach to the English
Courts with respect to aspects of trust law such as mistake and now
rectification. In this particular case, it is clear that the Royal
Court saw little reason to depart from the established three stage
test that had been a part of Jersey Law since 2002. On the basis
that the Court of Appeal had not determined that the three stage
test was wrong, and because the Court of Appeal had not heard
argument regarding the appropriate test for rectification, the
Royal Court was not afraid to depart from the view taken by the
Court of Appeal, and to reaffirm the three stage test.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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