Getting trusts right can be very difficult for trustees and getting it wrong can result in inheritance tax liabilities that may have been unforeseen. In Pitt v Holt and HMRC, the Court agreed to set aside a discretionary settlement which meant an inheritance tax liability arose.
Mrs Pitt’s late husband had been left with serious head injuries after a road traffic accident and she was appointed receiver under the Mental Health Act 1983 by the Court of Protection. It was decided to put damages received, which were needed to pay for his care, into a discretionary settlement. However, Mrs Pitt had not foreseen that there would be liabilities under inheritance tax. Whereas, had the money been put into a personal injury trust, there would have been no immediate inheritance tax liability.
HMRC argued that under the discretionary settlement, inheritance tax was payable on the creation of the settlement, on subsequent capital distributions, after ten years and on Mrs Pitt’s death. This had not been taken into account when Mrs Pitt and her advisors set up the discretionary settlement. It’s clear that paying inheritance tax would significantly reduce Mr Pitt’s damages.
Therefore, Mrs Pitt and her advisors applied to have the discretionary settlement put aside. Under the Hastings-Bass principle, where a decision made by trustees had tax consequences that not been taken into consideration, the Court agreed to set aside the trustee’s decision as, “if they had not misunderstood the effect that their actual exercise of the discretionary power would have, they would have acted differently.” The Court agreed the Hasting-Bass principle applied in Mrs Pitt’s case and agreed to set aside the discretionary settlement.
Had Mrs Pitt and her advisors created the correct type of trust, the correct level of tax would have been paid at the correct time and Mrs Pitt would not have faced going to Court to set aside an incorrect decision. Creating a trust is complex area of law and Lawson-West recommend anyone considering a trust or becoming a trustee seek expert legal advice.
Lawson-West can create personal injury trusts for anyone who has been awarded substantial damages designed to give long-term or life-long care for the injured victim.
