Junior staffer put multi-million-pound trust at risk

Friday 02 June 2023

A junior member of staff at a trust company who switched off reminders for bank interest payments inadvertently put a multi-million pound protected trust at risk, the Royal Court has heard.

The error resulted in interest repayments being delayed which, in turn, jeopardised the trust's protection from income and capital gains tax, making it potentially vulnerable to liabilities that the court said "would run to several million pounds".

At a recent hearing, Deputy Bailiff Robert MacRae – who was sitting with Jurats Karen Le Cornu and Michael Entwistle – heard a representation brought by Altum Trustees Limited and VG Trustees Limited, seeking to rectify the mistake by voiding the loan agreement and changing its repayment terms.

The court heard how Altum had received advice confirming that once the trust's settlor had become domiciled, he could not add value to the trust but it could receive a loan as long as it was on commercial terms with the charging and payment of interest at HMRC's official rate and paid at least annually.

On that basis, a loan of $1.2 million, later increased to $2.5 million, was then taken out under terms requiring interest repayment at six-monthly intervals. 

However, the court heard that Altum's efforts to set up an automatic internal payment system for the interest were compromised by "a junior staff member who had been given the job of carrying out this task 'switching off' the alert reminders for payment".

The consequence was that payments due in January and July 2020, and in January 2021 were not made on time – a problem that was then compounded by a banking error by Citibank who paid interest due until 5 April 2020 into the wrong bank account. It was discovery of this error that led to Altum learning that the consequences of the late payments were they might be a trigger for tainting the trust so that it would lose its tax-protected status.

Pictured: Deputy Bailiff Robert MacRae, who was sitting with Jurats Karen Le Cornu and Michael Entwistle.

Summarising the position before the Court, the Deputy Bailiff said: "Both counsel agree that the tainting issue which may have arisen could be addressed by a declaration that the trustee's exercise of its power to borrow under the terms of the trust is voidable and the Court determining that it should set aside clause 5.2 of the loan agreement (which deals with the particular stipulation in relation to the payment of interest) and declare that the interest due pursuant to clause 5.1 be payable 'at least annually'.

"Tax counsel said that such wording was likely to be 'technically effective' for the purpose of curing the tainting of the Trust and of retrospective effect for the purpose of the relevant UK tax legislation," Mr MacRae said.

Giving the court's judgment, the Deputy Bailiff said: "Had we been empowered to grant the relief sought in this case we would have voided the loan agreement and ordered that it had effect ab initio as if executed in the terms referred to above, conscious as we are that such terms were unobjectionable to the counterparty or the beneficiaries under the trust and (for all practical purposes), the C trust.

"However, we have not heard adversarial argument on this matter and prefer in the circumstances to express no concluded view on whether such an order is permissible."