Babbé win landmark Guernsey case on equitable mistake

The Guernsey Royal Court has given judgment in the case of Gresh v RBC & HMRC, ruling that a distribution out of a pension scheme should not be set aside on grounds of equitable mistake. The case tested the limits of recent decisions on mistake, including the Supreme Court’s decision in Pitt v Holt.

The case was originally brought by Mr Gresh based on the rule in Hastings Bass. HMRC’s attempt to intervene for the first time ever in a Hastings Bass case was rejected by the Royal Court, but vindicated on appeal. The case was then effectively stayed whilst Futter v Futter and Pitt v Holt progressed to the Supreme Court in England. Following the outcome of those cases Mr Gresh recast his application as one based on equitable mistake.

His contention was that his trustee had been operating under a causative mistake of fact as to the tax consequences of making a lump sum distribution to him, resulting in a substantial liability to income tax. HMRC conceded those points, but argued that there was nothing unconscionable in Mr Gresh retaining the proceeds of the distribution. Although a tax liability to HMRC on his part would result, as between the trustee as donor and Mr Gresh as donee, there was nothing unjust or unfair in his retention of the distribution such that neither the trustee nor Mr Gresh could have it set aside on grounds of equitable mistake.

In reaching its decision the Royal Court rejected an argument that the relevant legal test had, as a result of the Supreme Court’s decision in Pitt v Holt, moved away from its classic formulation into a broad and general test of fairness, regardless of whether it is unjust on the part of the donee to retain the property. In doing so it has set a boundary to the attempts of taxpayers to reintroduce by the back door the sort of wide-ranging relief once afforded under the now discredited Hastings Bass doctrine, often in the past regarded as a get-out-of-jail-free card for those seeking to avoid a charge to tax. Such parties and their trustees will continue to have to pay close attention to the prospects of claiming against those on whose erroneous tax advice they relied.

Babbé has acted for HMRC throughout the litigation, partner and head of litigation Ian Swan appearing both in the Court of Appeal on the intervention application, and at the recent Royal Court hearing of the substantive application.

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