Tax planning normally involves planning not to pay tax, or at least to reduce the amount of tax which one pays. The case of IQ EQ (Jersey) Limited Re The May Trust [2021] was an unusual case concerning tax planning in, what one might call, the true sense, planning to create a tax charge which, had the desired result been achieved in a straightforward manner, would not have arisen.
The beneficial objects of a trust (the ‘Trust’) governed by Jersey Law and resident in Jersey for Jersey and UK fiscal purposes included various members of a family, including R and a UK incorporated Charitable Incorporated Organisation (the ‘Foundation). The adult members of the beneficial class wished an amount equal to one half of the Trust Fund to be advanced by the Trustees to benefit, at least as to most of the advanced amount, the Foundation. The Trust Fund amounted to some £150 million so that half of it was £75 million. It was also intended that a further £30 million would be advanced for the benefit of the Foundation in the future.
Because the Foundation was a beneficial object of the Trust it would have been possible for the Trustees to exercise their dispositive powers to advance the funds directly to the Foundation. Had the Trustees done so, no UK tax charge would have arisen on the Foundation’s receipt because of the charitable exemption.
The adult beneficiaries believed, however, that it was:
‘ … appropriate for UK tax to be paid on at least a part of the sum which … [was] … to be made available on the basis that the payment of that tax enables government to provide a broader social benefit.’
So instead of a straightforward advance to the Foundation it was proposed that the Trustees should exercise their discretion to advance the funds to R who would then donate them to the Foundation. Even then, his donation would qualify for Gift Aid so that, although he would, as a UK resident individual, be subject to Income Tax on the donation he could receive an Income Tax deduction which would extinguish his liability.
So, in an exercise in artificial tax planning, the proposal was that an advance would be made to R who would make a donation to the Foundation but would not claim Gift Aid on it. The donation was to be equal to the amount received by R less the UK Income Tax which he would pay on it with the result that many million pounds of UK Income Tax would be chargeable and the amount donated to charity would be similarly reduced.
As the proposed advance was so large both as an absolute amount and as a proportion of the Trust Fund and the proposal was for such an unusual transaction, the Trustees made what is called, under Jersey Law, a ‘representation’ to the Royal Court of Jersey to approve and sanction the advance to R.
The question at issue was whether the proposed advance was a valid exercise of the Trustees’ power to make advances for the benefit of any one or more of the Trust’s beneficial class.
It is well established under the law of both England and Jersey that ‘benefit’ in this context is a word of very wide meaning which encompasses more than financial benefit. In the case of Re Clore’s Settlement Trusts [1966] it was held that a payment to a charity which satisfied a beneficiary’s sense of moral obligation to make charitable donations was a payment for the beneficiary’s benefit. In English law, however, the extent to which charitable donations may be of benefit to an individual beneficiary has been construed restrictively by the Courts.
For example, in the Chancery Division in X and another v. A and others [2006], which was cited by the Commissioner, Sir William Bailhache, in Re May, Mr Justice Hart had rejected the contention that all that is required to establish that a charitable donation was of benefit to an individual beneficiary was whether the individual reasonably considered himself to be under a moral obligation to make the proposed gift.
In Re May, however, the Commissioner declined to follow the authority of this English case.
The Commissioner cited the words of Birt DB in Re the S Settlement [2001] as to the issues which the Court needs to address when the Trustees wish to obtain the Court’s sanction for a decision ‘on which they have resolved and which is within their powers’:
‘(i) Are we satisfied that the Trustees have in fact formed the opinion in good faith that the circumstances of the case render it desirable and proper for it to make the appointment which is under consideration?
(ii) Are we satisfied that the opinion which the Trustees have formed is one which a reasonable trustee, properly instructed, could have formed?
(iii) Are we satisfied that the opinion of which the Trustees have arrived has not been vitiated by any actual or potential conflict of interest which has or might have affected its decision?’
The Commissioner found that conditions (i) and (iii) were clearly satisfied. In respect of condition (ii) the Commissioner considered it necessary to consider:
‘… these questions:-
(i) is the Proposed Distribution for the benefit of the proposed appointee?
(ii) is the quantum of the Proposed Distribution such that it would be an unreasonable exercise of the power, even given the power to ignore interests and the full and unfettered discretion afforded to the Trustees, such that it would be inappropriate having regard to the obligations of the Trustees towards the other beneficiaries?’
The Commissioner answered the second question in the affirmative. In respect of the first question he had previously stated that, subject to any particular provisions there may be in the relevant trust deed, ‘benefit’:
‘… as a matter of principle:
(i) goes wider than financial benefit and includes donations to charity (Re Wigwam), the payment of debts to HM Revenue (Re Bolan) and avoiding the detriment of parents of beneficiaries facing large tax claims arising from the transfers into the trust which they have made (Re N).
(ii) may include the application of trust monies to provide social or educational benefits for the beneficiary in question.
(iii) may include the application of trust monies in discharge of a moral obligation which the beneficiary, in receipt of the appointment which the trustees have resolved to make in his favour, accepts is one that should be discharged from that appointment.’
He went on to say:
‘Given the philanthropic donations which have been made from the trust in the years to date, which far exceed in quantum any distributions which have been made to individual beneficiaries, there is in our judgment no doubt that the provisional decision to make the proposed distribution is one at which the Trustees could properly have arrived. The Foundation is an acknowledged charity and is one with which the First and Second Respondents are closely connected as trustees. The payment of monies to the First Respondent in order that he may settle those monies on the Foundation enables the First and Second Respondents to continue their philanthropic work through the Foundation which is itself a beneficiary of the Trust. The fact that the arrangements which the First Respondent intends to make in claiming tax relief on the payment made by him to the Foundation does not detract from the purpose of making the payment which is nonetheless to benefit the Foundation. Equally, however, the decision not to claim tax relief in respect of some of the money to be paid to the Foundation also fits the social justice aspirations of the Family. All these features are matters which the Trustees could reasonably consider, as is clear that they have in the present case, support this conclusion that this Proposed Distribution would be for the benefit of the First Respondent.’
Could it really be said that the fact that the proposal had been designed to trigger a tax charge does ‘not detract from the purpose of making the payment which … [was] … nonetheless to benefit the Foundation’. As to that part of the advance which was applied in paying UK Income Tax, the Court might well have concluded that the payment did not have the purpose of benefitting the Foundation but rather had the purpose of benefitting the UK Government.
As to the Commissioner’s statement that:
‘…the decision not to claim tax relief in respect of some of the money to be paid to the Foundation also fits the social justice aspirations of the Family’.
It concentrates entirely upon the subjective opinions of the beneficiaries, the Commissioner seeming to have forgotten his earlier conclusion that:
‘At the heart of the debate is the nature of a trust which, as a result of the trustees’ legal ownership of an asset, is focussed on how that asset should be managed in the interests of the beneficial owners. It is therefore inevitable and right that trustees should identify who those beneficial owners should realistically be and look at the broader interests of those beneficiaries which must be viewed both from an objective and a subjective standard.
…
Secondly, there is a subjective element, namely the wishes of the beneficiary in question, which is bound to be a relevant consideration, to be weighed with and against all other relevant considerations.’
A further point of significant interest was rather skated over by the Commissioner. In para. 43 he said:
‘The first point to note in this respect is that a payment to the First Respondent in order that he may make payments to the Foundation cannot amount to a fraud on a power, assuming the Representor would have been prepared to benefit the Foundation directly, because the Foundation is itself a beneficiary. Those arguments therefore do not arise in this case, although, even if the Foundation had not been a beneficiary, it would be a question of judgment as to whether a payment to a beneficiary for transmission to a non-beneficiary was for the beneficiary’s benefit – if it was, the fact that a non-beneficiary would be the ultimate recipient of the assets in question would not, so it seems to us, be an impediment to making the payment.’
Unless the proposed advance was a benefit to R or to the Foundation, however, it would indeed have been a fraud on the Trustees’ power. It is surely arguable in respect of that portion of the advance which, under the artificial arrangements which were adopted by the Trustees and R, was diverted to the UK Government was not a benefit to the Foundation. We have seen that in deciding that the advance was a benefit to R, the Commissioner did not apply his own test that one must be able to identify objectively the benefit which would arise from the exercise of the power but only considered the ‘social justice aspirations of the Family’ which is surely to be characterised as what the Commissioner had called the ‘subjective element which is bound to be a relevant consideration’ and, therefore, one ‘to be weighed with and against all other relevant considerations’.
The States of Jersey, and its Courts, are keenly aware of the importance of the trust industry to Jersey’s economy. In this case they seemed to have taken a highly elastic view of the nature of a ‘benefit’ in order to allow the Trustees to fulfil the adult beneficiaries’ wishes.
