Court allows correction to trust to prevent £112,000 tax bill

A family have succeeded in correcting an error in a trust fund that would have resulted in a tax bill of £112,000.

The case involved a discretionary trust created in 2011 in respect of the estate of a man who had died in November 2010.

A beneficiary of his will was entitled to £250,000 from his estate. To avoid inheritance tax becoming payable on her death, she executed the Deed of Variation under the Inheritance Tax Act 1984, meaning that her interest in the estate was given to the trust.

In February 2012, she required further income so it was proposed that the trustees make an appointment to her, giving her an irrevocable life interest in the trust, so that income from the trust fund could be mandated to her.

A tax expert said that the appointment would not affect tax planning. On that advice, the trustees executed the Deed of Appointment (DoA).

On the beneficiary’s death in 2016, it became apparent that the specialist’s advice was incorrect. The interest created under the DoA was treated as part of her estate, creating a £112,000 tax liability.

The trustees applied to have the DoA rescinded as it had been created in error following mistaken advice.

The court held that the fact that rescission saved tax was not a reason for not granting it, but there had to be a mistake that was so serious as to render it unjust to let it continue. In this case, the trustees would not have entered into the DoA if the specialist had given the correct advice.

It would be unfair to leave the mistake uncorrected and so rescission should be granted.

Please contact Nigel Gibson-Birch or Lisa McBrearty if you would like more information about trusts or wills and probate.