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Scott Clayton

020 3356 9763



John Smart considers two recent cases in whack deeds of appointment with
unfavourable tax consequences have been held void by the Court
(taken from Issue No 18  –  January 2002)


The aim of this article is to consider some of the recent developments in the law relating to challenges to the exercise of dispositive powers1 vested in trustees. For present purposes it will be assumed that there is no doubt about the proper construction of the power, so that I am not considering challenges made by beneficiaries on the basis that the trustees have misunderstood the terms of a particular power. What, though, if the trustees have failed to consider the fiscal consequences? Can the Court (in effect) be asked to allow the ripping up of a deed of appointment? On one view this is precisely what has been done in two recently reported decisions at first instance. This  sounds too good to be true. Readers may recall that,

‘Not all that tempts your wand’ring eyes
And heedless hearts, is lawful prize;
Nor all, that glisters, gold’.2

General Principles
Before dealing with the most recent authorities, it may assist if some general principles are mentioned. A number of different formulations have been given by the courts3 but the following propositions are hopefully uncontroversial. In exercising their powers, trustees:

  • must be impartial as between the beneficiaries
  • must be independent and not simply sign whatever document a settlor places before them
  • should not act in bad faith
  • ought to consider the exercise of their powers from time to time.

There is some doubt as to whether it is correct to apply a Wednesbury4 unreasonableness test when the Court considers an attack by a beneficiary on the exercise of a discretion. The House of Lords, in Gisborne v Gisborne5 held that, in the context of a clause giving trustees an `uncontrollable` discretion, there can be no challenge in the absence of mala fides (which tends to be equated with dishonesty). In Dundee General Hospitals Board of Management v Walker6 the House of Lords seems to have doubted whether a wider power of interference was possible, although it was prepared to proceed on this basis.

Other authorities suggest that to avoid a challenge whether this is on the grounds of mala fides or capriciousness (with these expressions being given an extended meaning), trustees:-

  • should not act spitefully
  • should not act for reasons which could be said to be irrational, perverse or irrelevant to any sensible expectation of the settlor7.

The Hastings-Bass test
Readers will doubtless recall the well known decision of the Court of Appeal in Re Hastings-Bass Deceased8. Buckley LJ (considering the power of advancement conferred by s.32 Trustee Act 1925) stated,

`Where a trustee is given a discretion as to some matter under which he acts in good faith, the Court should not interfere with his action, notwithstanding that it does not have the full effect which he intended, unless

(1)  what he has achieved is unauthorised by the power conferred on him, or

(2)  it is clear that he would not have acted as he did

     (a) had he not taken into account considerations which he should not have taken into account, or

     (b) had he not failed to take into account considerations which he ought to have taken into account.`

More recently, in Scott and others v National Trust9 Robert Walker J had to consider, at an interlocutory stage, the decision-making process of the National Trust in connection with the ending of deer-hunting with hounds on Trust land. He held that certain points were `clear beyond argument` namely that trustees had to act `in good faith, responsibly and reasonably` and had to `inform themselves, before making a decision, of matters which are relevant to the decision` and he stressed the need to take professional advice.

He cited10 Lord Reid in Dundee General Hospitals Board of Management v Walker11 (referred to above, which was a Scots appeal to the House of Lords which he considered seemed to reflect the law of England) where it was stated that even where trustees are expressed to have an absolute discretion:

`If it can be shown that the trustees considered the wrong question, or that, although they purported to consider the right question they did not really apply their minds to it or perversely shut their eyes to the facts or that they did not act honestly or in good faith, then there was no true decision and the Court will intervene`.

Is it necessary to show that the decision would have been different?
When can it be said in a given case that the trustees’ decision-making process was sufficiently flawed for it to be quashed? The difficulty observed by Robert Walker J (as he then was) was that the cases12 are not completely clear on how to apply the principles in the real, `imperfect world` where:

`trustees (like other decision-makers) do often make decisions which are based on less than complete information and less than full analysis and discussion, and there is real difficulty in formulating the test for determining when a decision is so flawed as to be invalid. The authorities… are not completely clear as to whether the test is whether the trustees, if properly advised and informed would have acted otherwise, or whether it is that they might have acted otherwise. There is also the question of how materially different the trustees’ decision would or might have been..…To impose too stringent a test may impose intolerable burdens on trustees who often undertake heavy responsibilities for no financial reward; it may also lead to damaging uncertainty as to what has and has not been validly decided.` [Emphasis added].

Green v Cobham
In Green & others v Cobham & others 13Jonathan Parker J (as he then was) had to consider an application by trustees for a declaration that a deed of appointment of accumulation and maintenance trusts out of a will trust was void in circumstances where, subsequent to its execution, one of the trustees lost the ability14 to be treated as non-resident for CGT purposes with disastrous CGT consequences- the will trust became onshore for CGT purposes. The evidence was that no consideration had been given to the CGT consequences of the deed of appointment, and that the trustees would not have executed the deed had they considered the consequences. It was submitted not to be possible to say what precise course the trustees would have taken had the trustees appreciated the true position.

Re Hastings-Bass Deceased, Mettoy Pension Trustees Ltd v Evans and Stannard v Fisons Pensions Trust15 were considered by Jonathan Parker J who acceded to the application. He did not feel it necessary to express a view as to whether, as the CA in Stannard held16, it is possible to challenge the exercise of trustees’ discretion where it can only be said they might (as opposed to would) have acted differently had they considered a factor which they omitted to consider.

Note that on the facts before Jonathan Parker J there was held to be no doubt that the trustees would have acted differently had they considered the tax consequences.

The relevant deed of appointment was held to be void. So far as the decision itself is concerned, does it have the consequence that trustees can routinely escape the consequences of a failure to make a fiscally efficient appointment by applying to have an unsatisfactory deed declared void? Usually a person who misjudges the fiscal consequences of an act but who properly comprehends the legal consequences cannot set aside a transaction on the grounds of mistake.

A separate point is that it was argued in Green v Cobham that the tax problem arose for a matter arguably unconnected with the deed of appointment itself namely the retirement from practice of one of the trustees, but this objection was brushed aside by the judge (in my view wrongly, although this part of the decision was obiter dictum) on the basis that without the appointment the problem would not have arisen.

Green v Cobham was applied by Patten J in Abacus Trust Company (Isle of Man Ltd) v National Society for the Prevention of Cruelty to Children17. In brief, Abacus was a non-resident trustee that overlooked the advice of Leading Counsel to the effect that an appointment in favour of the NSPCC should take place in a subsequent tax year to that in which certain other appointments in favour of new trusts were to be made. The premature appointment (in the same tax year) to the NSPCC created a liability to CGT of £1.2m upon the Settlor. Citing Warner J in Mettoy Pension Trustees Ltd v Evans18, Patten J held that three questions arose:

`(1) What were the trustees under a duty to consider?
(2) Did they fail to consider it?
(3) If, so, what would they have done if they had considered it ?`

Holding the deed void, Patten J held19 that trustees are bound to have regard to the fiscal consequences of their actions and where it can be demonstrated that a proper consideration of those matters would have led to an appointment not going ahead the Court should treat the appointment as void ab initio:

` …The financial consequences for the intended beneficiaries of any intended exercise of a fiduciary power cannot be assessed without reference to their fiscal implications. The two seem to me to be inseparable. Therefore if the effect of an intended appointment is likely to be to expose the fund or its beneficiaries to a significant charge to tax that is something which the trustees have an obligation to consider when deciding whether it is proper to proceed with the appointment. Once relevance is established then a failure to take those matters into account must vitiate the exercise of the power unless (as in Hastings-Bass itself) it is clear that on a proper consideration of all relevant matters the decision would still have been the same.` [Emphasis added].

In Abacus, it was clear that if proper consideration had been given to the advice of Leading Counsel, the appointment in question would not have gone ahead. The words italicised above suggest that if, on a proper consideration of the matter, the decision of the trustees might have made a different decision, that should be sufficient to enable the Court to hold that the power has been invalidly exercised. However, it was not necessary for the point to be decided.

It seems to me to be that both Green v Cobham and Abacus may be wrongly decided on the basis that they overlook one of the pre-requisites for the application of the Re Hastings-BassDeceased test. Remember in the passage set out above, Buckley LJ’s words `notwithstanding that it does not have the full effect which he intended` before `(1) what he has achieved is unauthorised by the power conferred on him, or (2) it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account.`

Where a deed of appointment creates valid trusts which have the effect, as a matter of trust law, that was envisaged by those exercising the power it seems that the fiscal consequences, parasitic as they undoubtedly are upon the nature of the provisions contained in the appointment, should not be capable of affecting the validity of the deed.

Further consideration of the Hastings-Bass principle
Park J had to consider the scope of the Hastings-Bass principle in Breadner and others v Granville-Grossman and others20. There, a deed of appointment executed in 1976 contained a provision whereby the trusts appointed would continue in force unless the trustees exercised a power (contained in the appointment) before a given date. The power was exercised a day late. The beneficiaries taking under the 1976 appointment succeeded in having the late-executed deed of appointment declared invalid. One of the arguments put forward in favour of upholding the deed was that they should have executed it earlier so that the Hastings-Bass principle should be extended so that it allowed the Court to impose upon the trust fund the consequences of something that was not in fact done in time. Park J rejected that argument, rightly in my view.

Park J was of the view that the Hastings-Bass principle was:

`still at an early stage of development and the limits of it have not been established. There must be some limits. It cannot be right that, whenever trustees do something which they later regret and think that they ought not to have done, they can say that they never did it in the first place. Further, there is no reported decision (or, as far as I know, unreported decision) in which the principle has been applied so as to take away beneficial interests from the persons who are properly entitled to them under the trust instruments.`21

As to this passage, the consequence of declaring a deed of appointment invalid in accordance with the Hastings-Bass principle will surely affect beneficial interests created under it. Moreover, in Green v Cobham, the defendants to the application (the trustees of the appointment and the sole beneficiary under it) were content to have the deed invalidated. However, Park J is surely right to have reservations about the potential width of the Hastings-Bass principle.

A further argument was put forward concerning the validity of the earlier, 1976 deed. This was that on its true construction22 it was not a valid accumulation and maintenance settlement for Capital Transfer Tax purposes, contrary to what had been believed for 22 years. Therefore, it was argued, had the trustees realised that it failed to qualify they would not have executed it. Park J thought that the argument on construction was ‘abstruse and recondite’ even though it appeared to have merit. He was not prepared to allow the application of the Hastings-Bassprinciple so late after the event. He thought it would give rise to an ‘extreme and surprising result’23. He drew a comparison with the time limits applicable for judicial review and was of the view that,

`it would be astonishing, and to my mind unacceptable, for the emergent Hastings-Bass principle to be capable of being invoked in an attempt to upset some action by trustees which may have been taken decades ago (as in this case), and on the basis of which many intervening decisions and actions have been taken`.

Readers can judge for themselves the level of enthusiasm felt by Park J for Green v Cobham from the following passage:

`I do not say that I disagree with the decision but …despite Green’s case there must be limits to how far the courts will allow the principle in Re Hastings-Bass (decd) to rescue trustees from the consequences of their tax planning misjudgments. I do not feel impelled to suggest precisely where the dividing line lies between a case like Green’s case, where the court will hold the appointment by trustees to have been invalid, and a case like this one, where in my judgment the court will not. I point out however that in Green’s case the capital gains tax consequences of the appointment, if it stood, were most serious, and were appreciated at an early date after the appointment had been made`.

It is clear why, in practical terms, Park J felt concerns. However, it is unclear whether those concerns may perhaps have been based upon a belief that, where the trustees’ decision to execute a deed of appointment is potentially capable of being challenged in the circumstances envisaged by the Hastings-Bass case, this leads to the deed being voidable rather than void. The judgement suggests that the doctrine of laches may be applicable to bar relief in cases where many years have elapsed and/or that third party rights may make it inequitable for such relief to be granted. However the third party rights will not have not been acquired for valuable consideration (unless there has subsequently been assignment by a beneficiary of his rights) so that the traditional equitable bar to rescission on this ground would not seem to be available. There does not appear to be any support for the view in previous cases dealing with theHastings-Bass principle that it leads to a deed of appointment being voidable as opposed to void. On the other hand Park J might have had in mind that he should refuse a declaration that the relevant deed was void in the exercise of his discretion. This might appear to be a more satisfactory basis for his decision.

Park J also felt that he was not entirely convinced that if the trustees had been advised, before executing the 1976 appointment that it might not qualify for favourable tax treatment, they might not have gone ahead and executed it in any event. This part of his reasoning seems to suggest that in order to have a deed of appointment declared void it is necessary to show that the trustees would as opposed to might have made a different decision had they not failed to have taken into account a consideration which they ought to have taken into account.

The weight of authority seems to be against that view, as noted by Lawrence Collins J (obiter) in AMP(UK) plc and another v Baker and others24 (regarding himself bound by the Stannard v Fisons Pensions Trust and Kerr v British Leyland (Staff) Trustees Ltd cases). In AMP(UK) plc v Baker a certain company’s pension scheme rules provided that the deferred pension payable to a person leaving service with two or more years’ qualifying service was to be calculated as if the member was retiring on the grounds of incapacity. It was decided to improve the position of persons leaving the company as a result of actual incapacity but the rule changes effected by the trustees (with the consent of the company’s board) to implement the trustees’ resolution in this regard overlooked the provision dealing with all early retirers. It would have improved all such persons’ position at great cost. Subsequently further amendments were made to cap the position for the future but without affecting any accrued rights.

An application was made seeking rectification of the rule changes on the grounds of mistake, alternatively an order was sought setting aside the rule changes on the basis that the company’s consent to the changes was vitiated by mistake, or on the basis that trustees’ resolution was vitiated by their failure to take into account material considerations which would or might have affected their decision.

Lawrence Collins J granted the primary relief sought and his judgment is worth reading primarily for its consideration of the law on rectification of unilateral instruments. He was of the view that the cases showed that rectification was available if there was a mistake of law or as to the legal consequences of a settlement, although not if parties are mistaken about the commercial effects of transactions or have second thoughts about them. On the alternative relief sought, as mentioned above, he regarded himself bound by the Stannard v Fisons Pensions Trust andKerr v British Leyland (Staff) Trustees Ltd cases. He was also of the view that the language of the cases strongly suggested that the application of the Hastings-Bass principle may lead to an act of trustees being held void rather than voidable.

The Green v Cobham and Abacus cases make one wonder whether the Revenue will accept that the Hastings-Bass case can be used as a way of obtaining substantial tax advantages. The judgement in Abacus indicates that the Revenue chose not to be joined for the purpose of making submissions or to agree to be bound by the result of the decision. The former choice is one which they were entitled to make under RSC Order 77 Rule 8A in Sch. 1 Civil Procedure Rules 1998. However the latter stance seems unrealistic, at least for future cases. If the Revenue was to decide not to accept the decision of the High Court and to ventilate the matter before (presumably) the Special Commissioners, surely the Commissioners would have difficulty in refusing to follow the decision of the Court?

In summary, the recent applications of the Hastings-Bass case present a glistering prospect of obtaining substantial tax savings in certain circumstances. It will be interesting to see whether, if and when a similar case goes to the Court of Appeal, that Court will confirm that the Hastings-Bass case really does present a golden opportunity for rescuing trustees who have made fiscally disastrous appointments.

John Smart
9 Stone Buildings,
Lincoln’s Inn

1 See Underhill and Hayton: The Law of Trusts and Trustees 15th Edn pp 665-676. It is not the aim of this paper to deal with the Learoyd and Whiteley [1887] 12 App Cas 727 ‘prudent man of business’ test developed by the Courts applicable in the context of the exercise of administrative discretions e.g. investment powers, or the trustees’ duty of care imposed by the Trustee Act 2000.
2 Thomas Gray (Ode on the Death of a Favourite Cat).
3 For further reference see F Hinks in Trusts and Estates Law Journal for May 2000 pp22-24 and see also N.D.M. Parry at [1989] Conv (NS) 244.
4 Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223.
5 [1877] 2 App Cas 300
6 [1952] 1 All ER 896
7 Re Manisty’s Settlement [1974] 1 Ch 17 at 26 where capriciousness was equated with such conduct.
8 [1975] 1 Ch 25
9 [1998] 2 All ER 705
10 At p.717j-718a.
11 supra at p.905
12 The Dundee case and Re Hastings-Bass Deceased [1974] 2 All ER 193, Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 and Stannard v Fisons Pensions Trust [1992] IRLR 27 (CA).[2000] 13 WTLR 1101
14 By ceasing to carry on a business including the management of trusts: see s.62(9) Taxation of Chargeable Gains Act 1992.
15 See footnote 12 above for case citations
16 In Stannard reference was made to Kerr v British Leyland (Staff) Trustees Ltd (CA) 26th March 1986 now reported at [2001] WTLR 1071 to the effect that the omission from consideration of a factor which might materially have affected the trustees’ decision-making process rendered the decision ineffective.
17 [2001] STC 1344
18 [1990] 1 WLR 1587
19 At p.1353d-1354
20 [2000] 4 All ER 705
21 [2020 00] 4 All ER 722g-h
22 There was a reference in it to future adopted children, so that it could not be said that, as required by para. 15 Sch. 5 Finance Act 1985, ‘one or more persons…will, on or before attaining a specified age not exceeding 25, become entitled to an interest in possession’.
23 [2000] 4 All ER 731j.
24 [2001] WTLR 1265