The High Court dismissed an application by executors of a testator's will to rectify a settlement where there was no evidence that the testator's true intention had been to execute a settlement in a different form, even though it had not achieved the object of avoiding inheritance tax.

Facts

A wealthy testator made his will, taking steps to mitigate the impact of inheritance tax on his estate after his death. He instructed the first defendant solicitor to draft a trust settlement into which he paid £550,000 to make provision for his issue. The first claimant and the first defendant to the present proceedings were named as trustees and the beneficiaries were defined as the children and any remoter issue of the settlor born within an 80-year perpetuity period commencing on the date of the settlement.

The trustees had a discretionary power to pay or apply income to or for the benefit of one or more of the beneficiaries, with a power to accumulate income for 21 years. There was also a discretionary power to pay or apply capital to or for the benefit of one or more of the beneficiaries. The settlement was a fairly conventional discretionary settlement and there had been no distributions to any beneficiary since its creation.

Following the settlor's death, well after the expiration of the seven year period, Revenue and Customs pointed out that the inheritance tax saving intended to be achieved by the transfer of the £550,000 to the settlement had failed. They said that as the trustees had made no appointments, the settlement was a discretionary one in respect of which none of the beneficiaries had any interest in possession; nor did the settlement qualify as an accumulation and maintenance settlement within s. 71 of the Inheritance Tax Act 1984 (‘IHTA 1984’). In the circumstances, the transfer of the £550,000 to the settlement did not qualify as a potentially exempt transfer within IHTA 1984, s. 3A. The transfer was instead a chargeable transfer.

The first defendant claimed that he had acted in haste in drafting the settlement and did not fully appreciate the effect of the words used or the need to create an interest in possession and had made a genuine error in drawing up the settlement.

Therefore an application was made to the court to rectify the settlement by redrafting it. The Revenue did not wish to be joined as a party to the proceedings.

Issue

Whether rectification was justified as the testator had executed the settlement in a mistaken belief as to the effect of its drafting.

Decision

Rimer J (dismissing the application) said that rectification was a discretionary equitable remedy. Its function was to enable parties to a transaction to correct mistakes in the way their transaction had been recorded. It was no part of its function to enable parties to change the substance of the transaction they had entered into. The remedy of rectification was also available to achieve the correction of a voluntary settlement so as to enable any mistakes in the settlement as executed to accord with the settlor's true intention when he executed it (Re Butlin's Settlement Trusts, Butlin v Butlin [1976] Ch 251 applied). The present case was far removed from the usual type of case in which rectification was or might be available. The rectification sought was, in effect, the substitution of the settlement as executed by a settlement in materially different form, although what was formally sought was the amendment of the executed settlement by the deletion and addition of various provisions.

The evidence showed that the settlor's instructions to the first defendant went little further than an indication that he wanted to give away £550,000 in a manner which would save his estate from inheritance tax if he survived seven years; and that he wanted to do it by paying the money to a settlement he proposed to create for his children, whilst not wanting them to be entitled to the money until after his death. There was no suggestion that he had the faintest idea of the legal requirements of a potentially exempt transfer, let alone that he had ever considered s. 3A of IHTA 1984. In all the circumstances, the settlor intended to execute a settlement in exactly the form that the first defendant drafted. In so far as he was labouring under a mistake when he did so, that mistake was not as to the language, terms, meaning or effect of the settlement. His only mistake was that a payment of the £550,000 to it would be a potentially exempt transfer. A mistake of that nature was not one which the court had any jurisdiction to rectify. Since the settlor should be assumed to have understood the meaning and effect of the substantive trusts and powers of the settlement he executed, and to have intended to execute a settlement in that form with the legal effect it had, there was no error in the drafting of the settlement, or his understanding of it, that called for correction. It might be that, if the first defendant had given him proper advice, the settlor would have agreed to a settlement in the form of the proposed re-draft but that was not the point. The question was whether it could be said that he intended to execute a settlement in that form, and only executed the settlement in its very different form in the mistaken belief that it had in fact been drafted in the form of the re-draft. The proposition that he was labouring under any such mistake was absurd. He had no such intention and nor did he execute the settlement under any such mistake.

Chancery Division. Judgment delivered 26 July 2006.