Woman hit by tax bill allowed to set aside trust made in error

The High Court has set aside a trust settlement that was drawn up in error and would have resulted in a woman having to pay a large, unexpected tax bill.


The case involved a woman who made a settlement on the advice of her father to protect her assets from her former boyfriend. Most of the woman’s assets came in the form of gifts from the father.


He bought her a property to live in with her son. She had very little money or earning power so her father loaned her the money to buy a second property, without selling the first, to provide some income.


The woman claimed that her father’s intention was that the second loan should be repaid from the sale of the first property, his concern being to protect her assets from her former boyfriend.


The woman entered into a settlement to protect the two properties. However, the document was not correctly drawn up and so she found herself facing an unexpected tax bill when the first property was sold. It was only then that she realised that the transfer of assets into the trust would be a lifetime chargeable transfer for inheritance tax purposes, with additional 10-yearly, and entry and exit charges.


This was completely the opposite of what she had hoped to achieve so she applied to the court to have the settlement set aside.


The court held that in order to grant her application there had to be a serious mistake that made it unthinkable not to overturn the settlement. In this case it was clear that the woman had misunderstood what she was doing and had failed to appreciate that there were adverse tax consequences. The result of her actions was that she had created a settlement that did virtually the opposite of what she intended.


In the circumstances it was right that the settlement should be set aside.


Trusts can be a very useful way of protecting assets and reducing tax burdens but they have to be drawn up carefully or they can cause unforeseen consequences as in this case. It is important to seek legal advice to ensure the trust does exactly what you want it to do.


Please contact us if you would like more information about the issues raised in this article or any matter relating to trusts and tax planning.


As solicitors, we advise clients in relation to Wills and estate planning throughout Wales and beyond from our offices in Cardiff and Bridgend. If you would like to discuss how we may assist please do not hesitate to contact us by telephone or email us at wills@berrysmith.com . We also advise clients in relation to disputes regarding such matters – please call us or email us at disputes@berrysmith.com if you would like to discuss how we may be able to help.