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Kennedy v Kennedy – Mistake not Hastings-Bass?

The decision of the Supreme Court in Pitt v HMRC and Futter v HMRC to broaden the test for mistake (a unilateral mistake by the donor or the trustee) could lead to this remedy being more widely relied on than HastingsBass for trustees seeking relief where their actions have unintended fiscal consequences.

The judgment in Kennedy v Kennedy is illustrative of the potential effect of the decision in Pitt in the future.

1. Facts of the case

Mr and Mrs Kennedy and their solicitor were trustees of a settlement containing a number of assets, including cash and shares, in which Mr Kennedy had a life interest in possession. To reduce future Inheritance Tax (IHT) liability, Mr Kennedy was advised to appoint certain assets in the settlement as trusts for his children and grandchildren and the remainder to himself by way of a settlement agreement. However, the agreement was drafted in such a way to include a clause, the effect of which was to appoint to Mr Kennedy absolutely certain assets including shares in four companies. The appointment of these shares incurred a significant Capital Gains Tax (CGT) liability.

Mr and Mrs Kennedy sought relief by (1) a declaration that the relevant shares were not appointed; (2) an order to set aside the clause by which the relevant shares were appointed to Mr Kennedy absolutely; or (3) rectification of the clause to exclude the relevant shares.

2. Issues in dispute

Applying the principles applicable to rescission of a non-contractual voluntary disposition as set out in Pitt, it was held that the clause responsible for appointing the shares to Mr Kennedy was voidable in equity and the court could therefore exercise its discretion to set it aside.

The qualifying principles may be summarised as follows:

1. There must be a distinct mistake as distinguished from mere ignorance or inadvertence;

2. The mistake must be sufficiently grave as to make it unconscionable on the part of the donee to retain the property;

3. The injustice of leaving a mistaken disposition uncorrected must be evaluated objectively.

In this case Mr Kennedy mistakenly believed that the Appointment as drafted would not transfer the relevant shares to him, and Mrs Kennedy mistakenly believed that the Appointment was a tax efficient mechanism benefitting her children. Were it not for this mistake they would not have executed the appointment with the terms it contained, the effect of which was to substantially deprive the other beneficiaries of the settlement of the relevant assets and diminish the value of the remaining assets by the substantial charge to CGT payable.

...Kennedy illustrates that the effective widening of the basis for setting aside gifts and trusts for mistake in Pitt can be a valuable remedy.


3. Practical considerations

Although following the Supreme Court decision in Pitt v HMRC and Futter v HMRC trustees may find it harder to rely on Hastings-Bass, Kennedy illustrates that the effective widening of the basis for setting aside gifts and trusts for mistake in Pitt can be a valuable remedy.

Other long term effects of the decision in Pitt remain to be seen. The observation of Walker LJ in Pitt regarding "artificial tax avoidance" was mentioned in the judgment, however Kennedy was distinguished as no more than "a legitimate tax efficient method of conferring a benefit on Mr and Mrs Kennedy's children".

1 [2013] UKSC 23

2 [2014] EWHC 4129 (Ch)

3 per Walker LJ at paragraph 135, Pitt

This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. If you have any queries regarding this article please contact SC Andrew LLP.

Guest author:

Saman Salimi-Pour

Saman Salimi-Pour

Associate, SC Andrew LLP
T: +44 (0) 20 7183 1701

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