What is the rule in Hastings-Bass?

Introduction

The decision in Re: Hastings-Bass1 led to the development of a trust law principle that, it was thought, allowed certain decisions by trustees to be unscrambled on the basis that they had unintended (often tax) consequences. Setting out the “real” principle from the case, a recent Court of Appeal decision2explains that the law took a “seriously wrong turn” but has now been “put back on track”.

In this Alert:

• Key points
• The rules in Hastings-Bass
• Pitt v Holt | Futter v Futter in brief
• The Court of Appeal’s decision
• What next?

Key points

• The Court of Appeal has now set out the “correct” formulation of the principle in Re: Hastings-Bass.
• Acts which are outside the scope of trustees’ powers are void. But failing to take account of a relevant factor, or taking into account an irrelevant factor, merely makes a trustee decision voidable provided that it also amounts to a breach of a fiduciary duty.
• However, trustees will not be in breach of their fiduciary duty if they follow professional advice, even if that advice turns out to be wrong.

The rule in Hastings-Bass

Many of the cases involving the so-called rule or principle in Re: Hastings-Basshave involved private trusts, where the trustees received incorrect advice on the tax consequences of the exercise a particular discretion. But its use is not confined to cases involving tax as the principle has been applied more widely in the occupational pensions arena to cover other unintended consequences of trustee decisions.

Until recently, the leading case on the principle was Sieff and others v Fox.3 In that case, Lord Justice Lloyd (sitting as a High Court judge) described the principle as allowing the court to set aside the exercise of a trustee discretion where its effect was different from that intended, and the trustees would not have acted as they did had they not failed to take account of something relevant or taken into account something irrelevant.

Pitt v Holt / Futter v Futter in brief

The facts of both cases involved the unintended tax consequences of trustee decisions.

Mr Futter had two offshore trusts which contained “stockpiled gains” for Capital Gains Tax purposes. By making various distributions to beneficiaries to deal with this, the trustees inadvertently triggered a tax charge.

Following her husband’s road accident (in which he sustained serious head injuries), Mrs Pitt was appointed as her husband’s receiver under Mental Health legislation. She placed his accident compensation into a settlement which led to inheritance tax consequences.

When the High Court found in favour of both of the above parties based on the principle in Hastings-Bass, perhaps unsurprisingly, HM Revenue & Customs appealed. Given the similarity between them, the two cases were heard under a single appeal.

The Court of Appeal’s decision

Interestingly, the leading judgment in the Court of Appeal was delivered by Lord Justice Lloyd. Having examined the case law (including his own earlier decision), he declared that the original decision in Hastings-Bass had been misunderstood in subsequent cases. The correct principle is that:

• acts which are outside the scope of trustees’ powers are void. This may be because there has been a procedural defect (for example, a required consent has not been given) or due to a substantive defect (such as an unauthorised delegation);
• acts which are within the scope of trustees’ powers may be voidable where the trustees either fail to take account of a relevant factor, or take into account an irrelevant factor. An act will only be voidable (generally at the option of a beneficiary who is adversely affected) where it also amounts to a breach by the trustees of their fiduciary duty.

It is clear from the judgment that a failure to take into account certain tax consequences of a decision does not amount to a breach of fiduciary duty if the trustees acted on incorrect professional advice from “apparently competent advisers”. Instead, the appropriate remedy in such circumstances is for the trustees to seek damages against their advisers for negligence.

What next?

We understand that part of the decision may be appealed. Until then, with the ability to set aside acts which have unforeseen (and often undesirable) consequences severely curtailed, trustees in a similar position should discuss any concerns with their advisers.

1 [1975] Ch 25
2 Pitt v Holt and Futter v Futter [2011] EWCA Civ 197
3 [2005] 1 WLR 3811