Hastings-Bass challenge

Posted: 31st January 2013

The Supreme Court is to hear two important cases in which HM Revenue and Customs (HMRC) are opposing the right of trustees of a settlement to reverse a decision they took which had an unexpected side effect of creating an enhanced tax liability.

HMRC have challenged the 'Hastings Bass' principle, under which the courts have allowed trustees who made an error in dealing with trust affairs, which increased the liability to tax of the trust but had no other significant effect, to reverse the transaction.HMRC

In one of the cases, a husband who was severely injured in a motor accident had his settlement placed into a discretionary trust, with the unforeseen effect that, on his death, more then £200,000 in Inheritance Tax was payable. In the other, a misunderstanding of Capital Gains Tax law relating to assets distributed from a trust led to a tax liability of some £90,000.

In each case, the trustees have sought a court declaration that the settlements made by them were ineffective. HMRC have opposed the applications. The hearing will start on 13 March.

These cases are important for trustees. If HMRC win, errors such as those above will not be reversible and trustees who make decisions that fail to take account of all tax aspects could find themselves facing claims for negligence.