In T and C Bainbridge v P Bainbridge [2016] EWHC 898 (22 April 2016), the High Court found that a transfer to a trust which had triggered disastrous and unexpected tax consequences could be rescinded.
The Bainbridges, who were father and son, farmed in partnership. They had transferred several pieces of land to a discretionary trust, thereby triggering unexpected CGT. They applied for rescission of the transfer on the grounds of mistake, applying the principle in Pitt v Holt [2013] 2 AC 108. The High Court granted the relief sought in respect of the land which remained in the trust.
The trust had sold some of the land and part of the proceeds had been used to acquire other land (the ‘new land’). The claimants accepted that the buyers had bought in good faith so that the sales could not be rescinded, but they argued that the court should make an order restoring the new land to the owners of the original properties. The High Court agreed that the consequence of rescission was the same whether it took place because of fraudulent (or negligent) misrepresentation, or because of mistake. The property transferred must be vested back to the transferors unless third party rights were involved. Where third party rights cannot be disturbed, there is no reason not to apply a tracing process to exchange products of the transferred property in order to find other assets to which to apply the claim instead.
Finally, as to the tax consequences of rescission, the court held that once the transfers into the trust were treated as never having happened, the sales (actually by the trustees) should be imputed to the original owners. It also held that this applied to the use of the proceeds (in part) to invest in the new land (for roll-over relief purposes) and (in part) to pay stamp duty.
Why it matters: By accepting to apply a tracing process, whereby the original owners were deemed to have sold the land (as opposed to the trustees), the High Court made a roll-over relief claim possible for the original owners.
In T and C Bainbridge v P Bainbridge [2016] EWHC 898 (22 April 2016), the High Court found that a transfer to a trust which had triggered disastrous and unexpected tax consequences could be rescinded.
The Bainbridges, who were father and son, farmed in partnership. They had transferred several pieces of land to a discretionary trust, thereby triggering unexpected CGT. They applied for rescission of the transfer on the grounds of mistake, applying the principle in Pitt v Holt [2013] 2 AC 108. The High Court granted the relief sought in respect of the land which remained in the trust.
The trust had sold some of the land and part of the proceeds had been used to acquire other land (the ‘new land’). The claimants accepted that the buyers had bought in good faith so that the sales could not be rescinded, but they argued that the court should make an order restoring the new land to the owners of the original properties. The High Court agreed that the consequence of rescission was the same whether it took place because of fraudulent (or negligent) misrepresentation, or because of mistake. The property transferred must be vested back to the transferors unless third party rights were involved. Where third party rights cannot be disturbed, there is no reason not to apply a tracing process to exchange products of the transferred property in order to find other assets to which to apply the claim instead.
Finally, as to the tax consequences of rescission, the court held that once the transfers into the trust were treated as never having happened, the sales (actually by the trustees) should be imputed to the original owners. It also held that this applied to the use of the proceeds (in part) to invest in the new land (for roll-over relief purposes) and (in part) to pay stamp duty.
Why it matters: By accepting to apply a tracing process, whereby the original owners were deemed to have sold the land (as opposed to the trustees), the High Court made a roll-over relief claim possible for the original owners.
