Mackay v Wesley – A Clear Flaw With Trustee Law Which Unfairly Leaves A Trustee With A £1.6 Million Liability!

Stuart Parris

The recent case of Mackay v Wesley [2020] EWHC 1215 (Ch) decided that a Trustee remains liable for a £1.6 million capital gains bill which arose as a result of her predecessors actions. The Court acknowledged the apparent unfair consequences of their decision, however, were unable to allow the Trustee’s appointment to be set aside and remove the £1.6 million liability.

Mackay v Wesley

Background

The Trust in this case was part of a tax scheme which aimed to avoid any capital gains liability. Under the scheme, the previous Trustees made a number of distributions which left the Trust with around £60,000 of assets. The Trustees then retired in favour of the new Trustee who happened to be the daughter of the Trusts main beneficiary.

At the time of her appointment, the Trustee was in a particularly vulnerable state having recently lost her second child. The Trustee’s father was somewhat forceful in encouraging his daughter to become a Trustee and the claimant therefore became a Trustee without obtaining legal advice and without the knowledge of any potential liabilities.

After the claimant’s appointment, the tax scheme was found to have failed and a capital liability of £1.6 million arose. The Trust now had minimal assets and the liability became the Trustee’s. This immediately appears to be unreasonable on the face of it as the new Trustee was now liable for a £1.6 million capital gains tax bill, which only arose as a result of the previous Trustee’s actions.

Surrounding law

Typically, when Trustees retire in favour of new ones it is the retiring Trustees who have the power of appointment. This means it is only the retiring or continuing Trustees who can decide upon whom is to be appointed as a Trustee. A number of indemnities will also be agreed to, which means the retiring Trustee’s liability ceases on their retirement. Such indemnities were agreed to in this case, which prevented the claimant taking action against the previous Trustee.

Generally a new Trustee will have to agree to their appointment. It is however deemed to be the appointing Trustee’s choice as to the new Trustee’s appointment and the appointed Trustee is held to have no say in the appointment.

The claim

On realisation of the liability, the claimant sought to have her appointment set aside on three grounds. The Court rejected all three grounds as below:

  1. The claimant claimed to have lacked capacity at the time of her appointment due to the circumstance she found herself in. The Court doubted the lack of capacity and took the view she was aware of the appointment, albeit not fully informed to the role and the Trust. The Court further held that as it was previous Trustees who held the power of appointment, the appointment could only be set aside if they lacked capacity. Essentially holding that the claimant had no say on her appointment and her claimed lack of capacity made no difference to her appointment.
  2. The claimant also claimed to have accepted the appointment as a mistake. Again as the appointment was deemed to not be voluntary by the claimant, the claimant was unable to claim mistake. This was because the claimant could not possibly claim the appointment was entered into by mistake on her behalf when it is viewed that the claimant had no choice to her appointment. A claim of mistake may, however, be accepted by the previous Trustees. This is on the basis that their appointment of the claimant was a mistake. It is very unlikely for the previous Trustees to make such claim as the liability will then revert back to them.
  3. Finally the claimant argued her appointment was a result of undue influence from her father. For the same reasons, the Court dismissed this on the basis the appointment was deemed to not have been voluntary. No undue influence could therefore have occurred if the claimant is viewed to have been appointed regardless of her decision.

Impact

The decision held by the Court resulted in the claimant remaining liable for the liability of £1.6 million. This suggests that it is very difficult for a Trustee to set aside their appointment and creates an apparent unreasonableness towards new Trustees.

Whilst the High Court noted the unfortunate result of their decision, they were to be bound by previous case law and unable to come to any other decision. The claimant is now appealing the decision to a higher Court in the hope that an equitable decision may be reached.

The case would have had a very different outcome if the new Trustee had considered the indemnity provisions with a view to ensuring that she was protected in the event that there was any liability arising as a result of the actions of the previous Trustee.

Mackay Wesley

How Nelsons can help

Stuart Parris is a Trainee Solicitor at Nelsons.

If you are currently deciding whether to act as a Trustee for a Trust and would like a full review of the Trust, in particularly how an appointment may leave you exposed, please contact our Trust Administration team who will be able review the Trust and provide you with advice on potential liabilities.

If you are already a Trustee and feel you have or may become exposed to a liability due to actions made by others, please contact our Inheritance Disputes team who will be able to assist.

Please call 0800 024 1976 or contact us via our online enquiry form.

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