Trustees and beneficiaries of family estates will no longer be able to undo tax planning mistakes, as they have been stripped of a "safety net" that protects them from paying too much.
The law change comes from a Supreme Court ruling last week, in which two family trusts, one of which had paid £96,225 in unnecessary capital gains tax, lost a legal battle to claim it back from HMRC - the first time the revenue has ever won such a case.
The trustees, Mark Futter and Clive Cutbill, sought to distribute the trust funds to beneficiaries in a tax-efficient way. But it went wrong when an assistant incorrectly advised that beneficiaries' personal losses could be offset against capital gains in the trust.
Until now, the rules of Re Hastings-Bass gave trustees an opportunity to undo the damage caused by such mistakes, subject to Court supervision. But lawyers say the rule, which has always allowed trustees and beneficiaries to mitigate planning mistakes, no longer stands up because it has been undermined by the judge's decision, meaning trustees and beneficiaries will now have to exercise an extra air of caution because the rule no longer protects them.
Tax will now be payable on inefficient tax planning moves once they have been made, even if families have taken appropriate advice.
Paul Hewitt, partner at Withers, representing the Futter trustees, said trustees and beneficiaries who have paid too much tax despite taking advice will be forced to pursue professional negligence claims as they have no other way of undoing the planning. "This will not be in anyone's interests," he said. "It is a shame the Supreme Court's judgment takes a blanket approach to the setting aside of transactions based on trustees' flawed decisions. In our view, the more flexible approach previously available under the Re Hastings-Bass rule provided a helpful remedy for beneficiaries, while remaining open to scrutiny by the court, HMRC and other relevant authorities."
All trustees and types of trust in England and Wales could be affected - from pension funds to trusts created in wills. Trusts in Scotland operate under different laws.
Mark Futter, a trustee for the Futter trust, said: "I am disappointed with the decision of the Supreme Court."
