Trustees who make mistakes that have unintended tax consequences can normally obtain relief from the court.
Recently, a tax-avoidance exercise by which trustees of offshore trusts passed the absolute beneficial interest in the assets of trusts to the settlor in one instance and an absolute right to make advancement to the settlor’s children in the other was opposed by HM Revenue and Customs (HMRC). The aim of the scheme was to realise the gains inherent in the trust assets and set them off against unrealised losses by the individuals, thus achieving a saving of Capital Gains Tax (CGT).
However, due to a technical error in the way the scheme was set up, it was ineffective for tax purposes, which meant that HMRC sought to tax the gains without the set-off of the CGT losses.
The trustees applied to the court to have the transactions made void – and were successful, despite HMRC’s opposition.
In another case, trustees made a deed of appointment in favour of a wider class of beneficiaries, failing to realise that to do so meant that land held in the trust (and which had increased considerably in value) would no longer be eligible for hold-over relief and there might have been a deemed disposal of the trust assets for CGT purposes.
Again, the trustees were able to persuade the court to nullify the transaction.
Click here for guidance for charitable trustees.
Click here for information on the risks attached to being a trustee.