TRUSTS AND THE TAX CONTEXT

Question 1

Tax evasion v tax avoidance

Answer 1

• Tax evasion: not paying taxes that you are liable to pay
  
  • Common law offence of cheating the public revenue
• Tax avoidance: arranging affairs so a s not to be liable for tax where you might otherwise be liable
  
  • Not necessarily a crime
  • If the affairs were arranged more normally, you would have been liable for that tax
• The tension is when have the arrangement of the affairs to avoid tax been so complicated that it constitutes tax evasion
• A lot of tax planning is permissible

Question 2

Scholars on tax evasion and tax avoidance

Answer 2

• Lord Tomlin: “every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”
• Natalie Lee: “the effect of the media coverage has left the public believing that those who try to avoid tax legally are no different from those who evade tax and, even more importantly, those who follow measures intended by Parliament to allow taxpayers to minimise their tax bill are somehow ‘dodgy’”
  • The tax system is used not just to target undesirable behaviour but also to incentivise conduct
  • In the last 2 decades, Parliament has greatly increased the tax on cigarettes to discourage smoking, but this does not mean that quitting smoking to avoid paying the tax is tax avoidance

Question 3

Transparency elgislation

Answer 3

• Although these regulations usually target terrorist financing or preventing money laundering, they may have implications for the traditional structure of trusts if we are requiring people to disclose beneficial interests that ordinarily would not have been disclosed before
• The full impact has not been seen yet

Question 4

Pitt v Holt

FACTS

Answer 4

• Mrs Pitt took advice about the tax consequences of a particular arrangement, which turned out to be incorrect and exposed her to a large liability. She sought to have the trust set aside. The court reconsidered the law on the equitable jurisdiction to set aside a transaction on the basis of mistake.
  
  • They could have structured the trust in a way that would mean remove a large tax liability, but they were not advised properly
• Mrs Pitt relied on bad advice, she was not trying to minimise tax, she was trying not to incur a tax that she did not need to pay

Question 5

Pitt v Holt

Test for mistake

Answer 5

• Was the mistake of sufficient gravity that it would be unconscionable not to set it aside?
  
  • It was held that it would be unconscionable

Question 6

Pitt v Holt

Lord Walker’s obiter

Answer 6

• “In some cases of artificial tax avoidance, the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy … there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures”
  
  • By setting up an artificial tax avoidance scheme, you take the risk that it might not work
  • Public policy – tax avoidance should not be encouraged, it is undesirable
  • This is a relevant factor to take into account
  • Not applicable to Mrs Pitt because she was not trying to avoid tax in any way

Question 7

Van Der Merwe v Goldman

Answer 7

• H and W are joint owners of the family home. They intended to place the house to be held on trust for the family. The wife gives up her interest and transfers it into her husband’s name, who declares himself trustee along with his wife in favour of their children and grandchildren. He then transfers the title into both of their names. He thought this would benefit from a tax advantage, but in between getting the advice and carrying this out, the tax rules changed and they were now subject to a very heavy tax liability that they were not aware of
• The court could not be expected to withhold relief based on Lord Walkers obiter

Question 8

Hartogs v Sequent (Schweiz)

Answer 8

• Similar facts to Pitt v Holt; due to bad advice, the claimants were liable to pay a significant tax which they were unaware of
• “I should emphasise that the principles established by the Supreme Court in Pitt v Holt should not be viewed as an available “get-out-of-jail-free” card, which may be invoked wherever a taxpayer finds himself facing a charge to tax which has not been anticipated. The Supreme Court’s decision imposes strict limits on the circumstances in which a voluntary disposition may be set aside on the grounds of mistake. In the present case, all of the pre-conditions to the exercise of that jurisdiction have been established”

#

Question 9

Advantages and disadvantages of the modern discretionary trust

Answer 9

ADVANTAGES

DISADVANTAGES

Confidentiality

How do the trustees exercise discretions properly?

• Where is the line of demarcation?

Objects do not have vested interests and so retains flexibility

How do settlors and beneficiaries monitor and control trustees?

Very wide discretion

No uncertainty of objects because the remainder goes to charity

Question 10

Vatcher v Paul

Answer 10

• “The limitations in default of appointment may be looked upon as embodying the primary intention of the donor of the power”
  
  • Wherever the remainder is going

Question 11

Re Manisty’s Settlement

Answer 11

• Very wide powers to trustees (who could add anyone in the world to the class of beneficiaries apart from the settlor and his wife and children)
  
  • No uncertainty of object
• This was possible for this to be valid and enforced
• “The duties of trustees and rights of objects are the same for special and intermediate powers”

Question 12

How can a trustee’s discretion be controlled

Answer 12

• Letter of wishes
• Protectors

Question 13

Letters of wishes

Answer 13

• Can be sent to trustees indicating how you want them to exercise their powers
• Capable of providing confidential information provided to trustees, it can add further context to the exercise of their discretions and deliberations
  
  • Might include facts (on financial situation or family connections, for example)
  • Might include wishes
• Not binding on trustees [Breakspear v Ackland]
• In principle, the process of exercise of trustees powers are confidential (they are not obliged to give reasons as to why they exercised their powers in a particular way, but if the reasons are given they can be scrutinised)
• Give flexibility to trustees and settlor
  
  • There can be considerations that can be relevant if it is only exercising powers that will be binding if the trust is structured in a particular way

Question 14

Protectors

Answer 14

• Somebody, other than the trustees, who has an office created by the terms of the trust and they are authorised or required to play a part in the administration of the trust [Anthony Duckworth]
• Pugachev – P was a beneficiary and protector
• A way in which the settlor can permit somebody to have an influence on how the trustee exercises their powers

Question 15

Off-Shore

Answer 15

• Modifying trust law can incentivise setting up trusts in other jurisdictions
• Cayman Islands Special Trusts Alternative Regime Law (STAR Trusts) permits non-charitable purpose trusts exempt from the perpetuity rule that can be enforced by an ‘enforcer.’ Then, you can appoint beneficiaries if you want
  
  • There is not a charity as a remainder, it is allowed to be applied for a non-charitable purpose in perpetuity