A wealthy couple who spent years carefully planning how to pass their fortune on to future generations accidentally exposed a $15 million family trust to UK tax bill of more than half-a-million after a seemingly routine “tidying up” exercise, Jersey’s Royal Court has heard.

But the court has now stepped in to undo the mistake, having found following a hearing earlier this year that there was a crucial gap in the tax advice the couple had received.

In a reasoned judgment, handed down in June and made public for the first time this week, Deputy Bailiff Mark Temple – sitting with Jurats Dulake and Gardener – ruled that two agreements transferring shares into the Jersey trust should be treated as though they never happened.

The family had established the trust in 2003 as a vehicle for passing wealth to their children and grandchildren while also being “cost and tax efficient”, the judgment said. 

The proceeds of a “successful career”

The assets of the trust, the court heard, “comprised some of the proceeds of [the husband’s] successful career”, and ultimately held an investment portfolio which was built up over the years.

The couple – both anonymous, and identified only as ‘AB’ (the husband) and ‘BB’ (the wife, who died in 2023) in the judgment – were both South African by birth but had lived in the UK long enough to become “deemed domiciled” there for tax purposes in 2017 following changes in UK tax legislation. 

They had already transferred most of their overseas assets into the Jersey trust before the new rules took effect. 

UK law changes and restructuring

Years earlier, advisers at PwC in London had warned the husband that, because he would become “deemed domiciled” in the UK after many years of residence, his worldwide assets would become exposed to UK inheritance tax.

Concerned by impending changes to UK legislation, the family’s South African advisers approached UK law firm Irwin Mitchell in 2016 for advice. The judgment records that it appeared “no response” was ever received. 

Instead, advice was later obtained from chartered accountants Hazlems Fenton, who confirmed that from April 2017 long-term UK residents would become subject to UK tax on worldwide income, capital gains and inheritance.

This caused the couple “to ensure that as many non-UK assets as possible were transferred into the [Jersey trust] or similar structures prior to the legislation coming into force,” the judgment noted. 

An ‘overlooked’ asset

However, this did not include assets in a BVI company which were “of a different nature… in that they were ‘static’ assets which did not require constant monitoring”.

During an annual financial review in 2018, advisers noticed one asset had been overlooked, and the couple – by this point described as being “in their mid-seventies and… reliant on their advisers” – were advised to transfer those shares into the trust as well, in what the court described as a “tidying up” exercise.

But specific UK tax advice was not sought before the transfer.

Instead, the family’s South African advisers focused on the South African tax position and overlooked the consequences under UK law. 

The mistake was not discovered until years later when the family tried to transfer the remaining shares into the trust.

This time, the Jersey trustee reviewed the proposal and realised that the 2018 transfer had inadvertently triggered substantial UK tax liabilities. 

A bill worth over £500,000

According to expert tax advice placed before the court, the family faced an immediate UK inheritance tax bill of around £350,000, followed by a further £144,000 inheritance tax charge later this year.

In addition, annual UK income tax and capital gains tax liabilities stretching back to 2017 were estimated to amount to tens of thousands of pounds each year. 

Annual income tax was estimated at around £20,000 and capital-gains tax at around £13,000 for each relevant year, although the judgment said further information was needed to confirm the figures.

“I would have never proceeded”

The husband told the court he would never have gone ahead with the transfer had he understood the consequences.

“I would never have proceeded with the transfer… in 2018… had I been aware of all the material issues, which have exposed the assets of the Trust to very significant, but entirely (and permissibly) avoidable, UK tax liabilities,” he said in an affidavit provided to the court.

He added that allowing the mistake to stand would undermine “the whole purpose” of the trust and years of careful estate planning – a position the Royal Court agreed with.

It found there had been a “genuine mistake”, noting that the couple were already in their mid-seventies and had relied on professional advisers.

“There were no grounds to infer that [the couple] had deliberately run the risk” of creating the adverse tax consequences, the court said. 

The judges also rejected any suggestion that the arrangement amounted to aggressive tax avoidance.

“The Donation Agreements… were not in any sense an aggressive tax mitigation strategy, or a complex or artificial exercise in tax avoidance,” the judgment said.

Instead, they were intended to be “a straightforward and legitimate means of estate planning so that [the couple] could transfer their wealth to their children and future beneficiaries”. 

The court also observed that overturning the transfer would not deprive HM Revenue and Customs of tax it would otherwise have received.

“If the relief were granted, HMRC would not be losing tax which it would otherwise have gained,” the judgment read.

“If it were not granted, HMRC would be securing a form of tax windfall that it would only obtain as a result of the mistake.” 

It was also noted that the family had relied on professional advice throughout, with the Royal Court observing that refusing the application would likely have left the family and the trust’s beneficiaries pursuing negligence claims against their advisers instead. 

All of the adult beneficiaries supported the application. 

Having concluded the mistake was both genuine and serious, the Royal Court declared the two 2018 donation agreements “voidable” and of no legal effect, effectively rewinding the transactions as though they had never taken place. 

It also authorised the family to disclose the judgment and supporting evidence to HMRC if required.