Advisers' protection dissolves after tax case

A RECENT COURT decision has opened the door to a possibility of an increased number of claims against accountants and other professionals acting in an advisory position to trustees.

In Pitt v Holt, the Court of Appeal unexpectedly overturned what has been known as the principle set out in Re Hastings-Bass, which has been followed by the courts for over 30 years. This principle provided a get-out-of-jail-free card for professionals who, it was often alleged, had negligently advised a trustee on the consequences of a transaction.

The principle provided a simpler method for the beneficiaries of a trust to claw back losses from a transaction by allowing for transactions entered into by a trustee to be set aside after the fulfilment of certain criteria. Due to the fact that lower courts had interpreted these criteria in a fairly liberal way, the principle had become a popular alternative for recovering lost trust assets to the often-costly and time-intensive process of an action in professional negligence against the trustee’s professional advisors.

It is now expected that a number of claims will come to a head against accountants and other professionals because the argument that a claimant should pursue an application under Re Hastings-Bass to mitigate their loss is no longer open to a professional.

Re Hastings-Bass

In Re Hastings-Bass (1975) the Court of Appeal set aside a transaction in which assets had been advanced from one trust in to another in order to minimise inheritance tax (then estate duty). The court’s judgment provided that, in cases where a trustee acted under a discretionary power, a court should not interfere in that action unless it was clear that the trustee would not have acted as they did, had they:
(i) not taken into account considerations that they should not have taken into account; or
(ii) failed to take into account considerations that they ought to have taken into account.

In cases in which it was alleged that a professional had acted negligently when advising a trustee, it was possible for the trustee to apply to court under the Re Hastings-Bass principle to unravel a transaction (i.e. put the trustees and beneficiary in the position they were in before entering the transaction). A trustee would argue that they had either (i) taken into account considerations that they should not have considered (e.g. incorrect advice from an advisor), or (ii) failed to take into account considerations they should have considered (e.g. an omission on the part of the advisor).

The decisions of the lower courts since Re Hastings-Bass established that a failure to take into account the fiscal effects of a transaction was sufficient to unravel the transaction itself. This interpretation of Re Hastings-Bass came to the aid of accountants and other professionals advising on tax structures involving a trust designed to shelter tax liabilities.

The Court of Appeal’s recent decision

The recent unanimous Court of Appeal decision has effectively overturned the principle which the lower courts had followed since Re Hastings-Bass. In giving the lead judgment, Lord Justice Lloyd said there had been a “misunderstanding” of the effect of the decision in Re Hastings-Bass. The Court of Appeal held that the principle established in Re Hastings-Bass, properly formulated, was instead that where a trustee makes a decision that leads to unintended consequences, the only way to unravel those consequences is either in cases where:

• the trustee acts outside the scope of his powers; or
• the trustee is in breach of duty.

When applications have been made under Re Hastings-Bass, it has been because the trustee had acted within their powers, meaning that the former case is not relevant. This leaves the question, therefore, of what constitutes a breach of duty by a trustee.

Breach of duty

The Court of Appeal held that a failure to take into account a relevant factor in making a decision could be a breach of duty by a trustee. However, where a trustee seeks professional advice and follows that advice, a trustee is not in breach of duty in the absence of any other basis on which to challenge the trustee’s decision. It is not a breach of a trustee’s duty if they act on advice that turns out to be materially wrong.

The Court of Appeal went as far as to say that, where a professional is instructed to advise on a transaction, it is the duty of the advisor to either (i) give the necessary advice, or (ii) point out areas on which advice may be needed that should be sought from another advisor with the relevant expertise. As Lord Justice Lloyd said in his leading judgment, where a trustee is let down badly by professional advice “it seems to me that [a trustee’s] remedy for that lies not in the realms of equity but by way of a claim for damages for professional negligence”.

Effects

There is likely to be general dissatisfaction expressed with the outcome of the Court of Appeal’s decision, overturning such a well-established principle on the basis that the lower courts had incorrectly applied the decision in Re Hastings-Bass. It is now expected that a number of claims will come to a head against accountants and other professionals because it is no longer open to a professional to argue that a claimant should pursue an application under Re Hastings-Bass to mitigate their loss.

The remedy under the Re Hastings-Bass principle, which was a quicker and cheaper way to unravel a transaction with unintended consequences, has been removed. The alternative is likely to be prolonged and expensive professional negligence proceedings against the accountants or other professional advisors who provided the negligent advice that the trustee acted upon.

The case also provides another example of HMRC closing loopholes and showing a willingness to pursue actions to the higher courts in order to increase the tax take. Tax advisors in particular will find themselves in the firing line as courts become more unwilling to unravel transactions.

Although the decision is surprising after all these years, commentators have pointed out that it is, in fact, fair. Re Hastings-Bass left a negligent professional advisor in a better position when they were advising a trustee (including a professional trustee) than when advising an individual. It is unknown at the moment if the decision is going to be appealed.

Jane Howard and Simon Laird are partners in the professional risks group at City firm Reynolds Porter Chamberlain