Member Article

Equitable jurisdiction to rescind a mistake in relation to a gift

With Watson Burton LLP Law Firm

In order to minimise inheritance tax (“IHT”) payable by an estate, lifetime transfers are commonly used. These are transfers of an asset, either directly to an individual, or into a trust.#Lifetime transfers are either immediately chargeable at 20% (“LCTs”), or are potentially exempt (“PETs”). If the donor survives the seventh anniversary of the gift, the gift will attract no further IHT. If the donor dies between three and seven years, a proportion of the full rate is taxed. Someone considering making lifetime transfers should realistically think about their chances of surviving seven years. If it is unlikely, then other options should be explored.

In Ogden v RHS Griffiths (2008), Mr Griffiths wished to mitigate the effect of IHT on his estate. Following the advice of his tax consultants, Mr Griffiths, then aged 74, created three trusts. He created two on 7 April 2003, valued at around £363,000, and a third on 3 February 2004, worth £2,644,000.

In the autumn of 2004 Mr Griffiths was diagnosed with lung cancer and he died on 17 April 2005. Only two years had passed since the creation of the first two trusts, and so the transfer creating them, and the 2004 one, became chargeable. The IHT was over £1 million.

His executors sought to set aside the transfers on the grounds that Mr Griffiths had mistakenly believed that he would survive seven years and therefore equity should set aside the transfers. They said that if he had known his life expectancy was so short, he would not have made lifetime transfers.

The judge set out the test to be applied: (1) there must be a sufficiently serious mistake; and (2) it must be shown that had the mistake not been made, the person who made it would have acted differently.

Mr Griffiths suffered from severe rheumatoid arthritis, which was controlled by immuno-suppressants and steroids. When the cancer was diagnosed, due to his pre-existing illness, his oncologist advised against systemic treatment as it was too dangerous.

In this case, the judge held that the mistake was sufficiently serious that he was convinced that Mr Griffiths would have acted differently had he known about the cancer. He then considered letters from Mr Griffiths’ doctors and, using these, determined that only the final transfer was made at a time where Mr Griffiths was acting under the mistaken impression that he would live for seven years or more.

Therefore the judge held that the February 2004 transfer was voidable, as it would be unjust for the donees to retain the gift in circumstances which imposed upon the donor an unintended liability to IHT. The key point in this case is the court’s wide equitable jurisdiction, and it is worthwhile considering this in circumstances where PETs have failed.

If you have any comments or questions about this article, please contact Benjamin Hanley of Watson Burton LLP at benjamin.hanley@wastonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .