In Mackay v Wesley [2020] EWHC 1215 (Ch), a Court of Appeal decision highlights the significant costs of being a trustee when tax planning goes wrong and a trustee finds themselves solely liable for the trust's tax liabilities.
A trustee of a family trust that had implemented a Capital Gains Tax (CGT) avoidance scheme which failed, found herself jointly and severally liable for a £1.6m CGT liability. As the only liable person with any significant assets, the burden of paying the tax fell almost entirely on her.
She asked the court to rescind her appointment as a trustee, or find that she had never become one, citing that she:
- Was the subject of undue influence by her father.
- Did not know what she was signing when she agreed to become a trustee, lacked the capacity to sign and had received misleading explanations and misrepresentations about the trust.
The court reviewed the facts and evidence, noting a lack thereof regarding her capacity and refused to rescind the appointment. In part, it was because she had failed to disclaim her appointment as trustee and also as she had signed not one, but four deeds accepting the appointment. The judge also found that the law on mistake did not apply.
Whilst this case relates to the use of offshore trusts in tax planning arrangements, specifically the ‘round the world’ scheme defeated in the Smallwood case, the lessons to be learned apply to any UK trust or trust with potential UK tax liabilities. It is a stark reminder that accepting a role as a trustee should not be taken lightly, even where the trust benefits the individual’s own family and the appointment comes at the request of a close relative.
The fiduciary duties and responsibilities of a UK trustee are governed by the Trustee Acts but trustees are also bound by the terms of the individual trust deed. If they fail to meet the requirements of either the law or the deed, they can be sued by the beneficiaries for breach of trust and replaced by the court.
More importantly, in this case, it is the trustees who are liable for the tax liabilities of the trust and, if there are not sufficient assets within the trust to pay these or the trust deed prohibits it, this liability becomes personal. Whilst there may be several trustees, as Ms Mackay found out to her cost, if you are the only one with any assets, you may be the one left holding the proverbial 'baby'. Whilst she has appealed the tax charge to the First Tier Tribunal (FTT), given the decision in Smallwood it seems unlikely she will achieve anything other than yet more legal fees.
Professional advisers are often asked to be trustees for clients’ family trusts and should consider their legal responsibilities and potential liabilities carefully before accepting such requests, especially in the context of their professional insurances and where tax planning is involved. Interestingly in the Mackay case, a nominee company owned by the family lawyers was also jointly and severally liable for the tax due but did not have any assets.
One key area to consider when asked to become a trustee is the residency of the trust. Depending on the position of the original settlor when the trust was set up, the appointment of a single UK trustee, even where long term offshore trustees remain in office, can cause a non-resident trust to become UK resident with all of the resulting tax consequences of UK residency. In the event of HMRC enquiry and additional UK tax liabilities becoming due, the UK trustee will be much easier to track down and assess than a faceless corporate body situated in an offshore tax haven.
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UK Trusts
Trusts have been used in various forms for tax planning purposes for many years and the tax legislation has had to evolve with them.
Non-resident trusts
Non-resident trusts have long been used for tax planning purposes and as a result, the legislation has been changed many times in order to deal with perceived tax avoidance.
Rectification of Trustee mistakes
Rectification is a remedy that allows trustees’ actions to be overturned by the courts.
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