The Court of Appeal upheld the High Court's refusal 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

In order to mitigate the impact of inheritance tax the deceased had instructed the first respondent solicitor to draft a trust settlement into which he paid £550,000 to make provision for his children and their issue. 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 for a potentially exempt transfer, 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 IHTA 1984, s. 71. 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 respondent 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. The High Court dismissed an application to rectify the settlement by redrafting it. The Revenue did not wish to be joined as a party to those proceedings ([2006] BTC 8,040).

The appellants appealed submitting that the judge had taken too narrow a view of the remedy of rectification by confining it to a case in which there was a mistake about the meaning of the document, whereas, on a proper understanding of the doctrine, it applied to a case such as the present where the settlor was under a mistake about the effect of the document he had signed.

Issue

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

Decision

Mummery LJ (Carnwath and Hooper L JJ agreeing) (dismissing the appeal) said that there were serious difficulties in fitting the facts of this case into the legal framework for granting rectification. The position was that the settlor intended to execute the settlement which he in fact executed, conferring benefits on his three children. The settlement correctly recorded his intention to benefit them through the medium of a trust rather than the alternative of making direct gifts in their favour. There appeared to be no mistake by the settlor in the recording of his intentions in the settlement.

The mistake of the settlor and his advisers was in believing that the nature of the trusts declared in the settlement for the three children created a situation in which the subsequent transfer of funds by him to the trustees would qualify as a potentially exempt transfer (PET) and could, if he survived long enough, result in the saving of inheritance tax. That sort of mistake about the potential fiscal effects of a payment following the execution of the settlement did not satisfy the necessary conditions for grant of rectification. The mistake did not result in the incorrect recording of his intentions.

The appellant's difficulty was not simply to establish a mistake such as would justify the intervention of the court, but also to show how the document should be corrected. The judge had examined the alternative draft that had been put in front of him with the invitation that that should be the rectified form of the document. He had correctly concluded that the evidence fell short of proving that he intended the settlement to incorporate the various trust powers and provisions set out in the alternative draft. That was an additional reason why the appeal had to fail.

Court of Appeal (Civil Division).
Judgment delivered 3 April 2007.