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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Representation of JTC Trust Company Limited re the L Trusts 12-Mar-2021 [2021] JRC 068 (12 March 2021) URL: http://www.bailii.org/je/cases/UR/2021/2021_068.html Cite as: [2021] JRC 68, [2021] JRC 068 |
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Before : |
T. J. Le Cocq, Esq., Bailiff, and Jurats Ramsden and Austin-Vautier |
IN THE MATTER OF THE REPRESENTATION OF JTC TRUST COMPANY LIMITED AS TRUSTEE OF THE L TRUSTS
AND
IN THE MATTER OF THE TRUST (JERSEY) LAW 1984
Advocate H. E. Brown for the Representor
Advocate D. P. Le Maistre for the minor beneficiaries
judgment
the bailiff:
1. This is an application by JTC Trust Company Limited in its capacity as Trustee of a number of Trusts relating to the L Family. The Trusts are as follows:
The B Trust ("B")
The C Trust ("C")
The D Trust ("D Trust")
The E Trust ("E Trust")
and The F Trust ("F Trust")
2. The Settlors of the D Trust, the E Trust and the F Trust are one of three brothers. The Settlor of the B Trust is their mother and the Settlor of C Trust is their uncle, both of who are now deceased.
3. The D Trust, the E Trust and F Trust and the brothers' Trust are all drafted in similar terms. The Beneficiaries of each of these are defined in Clause 1(c) of the respective Trust instruments to include:
(a) The children and remoter issue of the Settlor;
(b) The children and remoter issue of the brothers and sisters of the Settlor;
(c) The spouses, widows, and widowers of those within (a) and (b);
(d) Other persons that are designated as a Beneficiary pursuant to Clause 6;
(e) Such charitable purposes as the Trustees may appoint. There are no such appointed charitable purposes.
4. By deeds executed on 23rd March 1984, 2nd May 1984 and 8th March 1985, the Trustees excluded each of the brothers from benefit under their respective trusts. These clauses, referred to as "the Prohibition", were in the following terms:
5. In summary, therefore, the brothers and their spouses were excluded from the Trusts which they themselves settled. Whilst none of the brothers is among the class of beneficiaries of the Settlement created by his siblings, at all material times each brother was amongst the class of persons who could lawfully be added as beneficiaries to those settlements. The brothers are beneficiaries expressly of the B and C Trusts.
6. For a number of years, the Trusts have made loans between them either directly from Trust to Trust or from or to wholly owned companies within the Trusts. The loans continued after the execution of the Prohibition and they were all made on interest free terms. For these purposes, we will refer to the Trusts making the loans as "the Lending Trusts" and those receiving the loans as "the Recipient Trust". The Trustee was the Lending Trustee and the Recipient Trustee in each case.
7. In 2018, the Trustee sought advice from tax counsel, Mr Rory Mullan, who advised that the various inter-trust loans, by reason of the fact that they were interest free, were transfers in breach of the terms of the Prohibition and accordingly made in breach of trust. He also advised that those transfers gave rise to potential charges for United Kingdom tax about which we will say more hereunder.
8. In the light of this advice, the family and Trustee entered into an arrangement on 28th March 2018 ("the Arrangement") to rectify the situation by reconstituting all of the loans as fully commercial and interest bearing in accordance with a rate that has been accepted by HMRC. From that date there was no breach of trust and the loans would not give rise to a charge to UK tax.
9. That leaves however, a potential liability for the years prior to the Arrangement. The Arrangement in part provides as follows:
Naturally the existence of a waiver or indemnity does not cure any breach of trust.
10. Pursuant to an Act of this Court dated 13th March 2020, HMRC was convened to these proceedings but has taken no active part. It has rehearsed certain arguments in correspondence but did not appear before us. This has resulted in the application before us in effect proceeding unopposed without contrary argument although we have had regard to HMRC's argument set out in correspondence.
11. The Trustee, as Recipient Trustee, seeks an order that it holds certain proceeds of loans made from each Lending Trust as constructive trustee for the Lending Trust both as to the original sum transferred up until the date of the Arrangement and any profits or advantages flowing therefrom during that period. In the alternative, it was argued that if there are no constructive trusts, then the matter should be approached on the basis of a mistake.
12. It is clear that the transfers were made in breach of trust by reason of the Prohibition and the fact that prohibited persons were capable of being added as beneficiaries of the Recipient Trusts and therefore potentially able to take a benefit.
13. This, according to the advice of Mr Mullan, has created significant potential tax liabilities on the settlors in the form of:
(i) Charges under the transfer of assets abroad code in the UK Income Tax Act 2007, Part 13, paragraph 714 et seq;
(ii) Charges arising under the UK Income Tax (Trading and Other Income) Act 2005;
(iii) Charges arising under the Taxation of Chargeable Gains Act 1992;
(iv) The risk of "tainting" so that the various provisions conferring "protection" from charges on certain trusts is lost.
14. Mr Mullan further advised that:
(a) If there had been no breach of Trust there would have been "no question" of the Settlors being exposed to income tax charges;
(b) If the effect of the breach of trust was that there was a claim against each Recipient Trust in respect of interest and/or the advantage occasioned by the breach of trust, then the position would seem to be no different to that which would apply if the loans had been agreed on arm's length terms, so there would be no tax liability on the Settlors; however
(c) If the correct analysis is that the loans have been on beneficial terms and have provided a benefit to the Recipient Trust, then it follows that the Settlors were liable to tax on income arising to the Recipient Trusts to the extent that such income can be traced back to the beneficial loans provided by the Lending Trusts (and this appears to be the position that HMRC adopts). The financial consequences are potentially substantial.
15. This application by the Representor is brought under Article 51 of the Trust (Jersey) Law 1984 ("the Law") for a declaration that the Recipient Trustee holds both the sums transferred until the date of the Arrangement and the benefit and advantages from that sum as constructive trustee for each Lender Trust. On the information before us we accept that the transfers and loans were clearly made in breach of trust in as much as they were in breach of the Prohibition. It is also the case that we accept that the Trustees may not have realised that transfers to a trust on an interest free basis by way of loan where a prohibited person might potentially benefit would be in breach of the Prohibition. We accept that the Trustee only became aware of that when Mr Mullan advised on the matter in 2018.
16. Article 51 of the Law provides as follows:
17. The argument as to constructive trusteeship is based primarily on Article 33 of the Law and failing which the general law on constructive trusteeship. As an alternative, as we have said above, the Representor proceeds on the basis of a mistake.
18. Article 33 of the Law is in the following terms:
19. In our judgment, the transfer of a sum of money interest free even if it is to be repaid is a 'gain' or 'advantage'. Furthermore, there is no question of the Recipient Trust being a bona fide purchaser as the loan was interest free. In any event, the Recipient Trustee had notice of the breach of trust.
20. In our view the meaning of Article 33 of the Law is clear. We are aware that an argument has been advanced in correspondence by HMRC that Article 33 deals with the consequences of a constructive trusteeship but does not impose a constructive trusteeship on its terms. If we have understood that argument correctly, we reject it.
21. It is clear that Article 33 creates a species of constructive trusteeship. It is not exclusive and there are other circumstances in which a constructive trusteeship can arise. However, it seems to us to be clear that where Article 33 applies then there is a constructive trusteeship as a matter of operation of the Law.
22. In essence Article 33 simply deems a constructive trust to be created of any profit, gain or advantage from a breach of trust in the hands of the person who has gained that profit, gain or advantage. It is clear that there is no beneficial entitlement of the Recipient Trustee to that profit, gain or advantage and therefore in the circumstances it would appear that the Trustee holds any profit, gain or advantage that it has made to itself and received in breach of trust on constructive trustee for the Lending Trust.
23. In our judgment, therefore, Article 33 applies and a constructive trusteeship has been created. The trustee holds any of the proceeds transferred to it and which it received in breach of trust as constructive trustees both as to the capital until the Arrangement and as to any interest or income derived from it until the date of the Arrangement on constructive trust for the Lending Trust.
24. Having made that determination, it is not necessary for us to go on to consider whether a constructive trust might have arisen outside the parameters of Article 33 of the Law nor the question of mistake.
25. We heard from Advocate Le Maistre who was appointed to represent the interests of the minor beneficiaries. He observes that, should there be a tax liability that attaches to the trusts, then those persons whose interests he represents would potentially be disadvantaged. He sees no reason to argue against the conclusions set out by the Trustee and accordingly supports them.
26. Accordingly, we conclude that under Article 33 a constructive trust exists in respect of proceeds arising before the Arrangement converted the loans to 'interest bearing'.