Trustees' options when unintended tax consequences arise

Trustees operate in an increasingly complex tax environment. Even with careful planning and professional advice, decisions can sometimes produce unexpected tax consequences – either because something was overlooked, advice was wrong or documentation failed to give effect to what was intended.

When this happens, trustees are not without options. English law offers a number of remedies which, in the right circumstances, may allow a transaction to be unwound or corrected. This article outlines the principal routes available to trustees and the situations in which each may be appropriate.

Although the focus here is on English law, trustees of offshore trusts should note that equivalent remedies are often available in other jurisdictions, sometimes applied with greater flexibility.

The main remedies available to trustees

In broad terms, unintended tax consequences tend to arise in one of three ways, each pointing towards a different remedy:

1. Inadequate consideration – the trustee failed to take account of a relevant factor (known as the rule in Hastings Bass)
2. Mistake – the trustee acted under a genuine misunderstanding about the effect of the transaction
3. Defective documentation – the paperwork does not reflect what was actually intended (Rectification)

Which remedy is available depends less on the size of the tax liability and more on how it arose.

The rule in Hastings Bass

Trustees have a fiduciary duty to consider all relevant matters when exercising their powers. Where they fail to do so, the court may set aside the decision under the rule in Hastings Bass, effectively unwinding it.

In a tax context, this remedy is most likely to be available where tax consequences were not considered at all or the trustee failed to question obviously flawed advice.

However, Hastings Bass is relatively unattractive in practice. Because it is based on breach of fiduciary duty, the trustee cannot usually bring the claim themselves and the process involves establishing fault on the part of the trustee, with potential personal exposure. For this reason, trustees more commonly rely on the doctrine of mistake, which does not require breach of duty to be shown.

Mistake and unintended tax consequences

The doctrine of mistake is concerned with whether trustees genuinely misunderstood what they were doing when they entered into a transaction.

In tax cases, the courts have accepted that a mistake about tax can, in principle, support a successful claim. As confirmed by the Supreme Court in Pitt v Holt [2013], this will usually be the case where trustees proceeded on the basis of a clear but incorrect belief about the tax consequences – for example, believing a transaction would be tax neutral or fall within an exemption when it did not.

Where that mistaken belief was central to the decision, the court may set the transaction aside, effectively treating it as if it never happened and removing the unexpected tax liability.

However, this must be distinguished from cases where trustees knew the tax position was uncertain and chose to proceed anyway. Where trustees deliberately accept a tax risk and that risk later materialises, an adverse outcome does not amount to a mistake. The Court of Appeal confirmed this in Bhaur v Equity First Trustees (Nevis) Ltd [2023], where relief was refused as the parties had knowingly taken the risk that the planning might fail.

The key distinction is therefore a practical one: a mistaken assumption about tax may be remedied, but a conscious decision to run a tax risk will not.

This approach was applied more recently in JTC Employer Solutions Trustee Ltd v Garnett [2024], where the court accepted that the trustees acted under an incorrect but conscious belief about the inheritance tax consequences of their decision. The case illustrates the importance of recording not only trustee decisions, but the tax assumptions on which those decisions are based.

Court discretion and public policy

There remains some uncertainty as to whether public policy could operate as an independent reason to refuse relief for mistake, and how such a principle would be applied in practice. This issue was raised by HMRC in JTC Employer Solutions Trustee Ltd v Garnett [2024], but the court described the argument as "somewhat obscure" and indicated that public policy should only be considered where it is directly in issue. As a result, the scope and application of any public‑policy limitation in this context may be examined more closely in a future case.

Rectification: correcting defective documents

Rectification is available where a written document does not reflect the parties’ true intention at the time it was executed. The problem in these cases lies not in the trustees’ understanding, but in the way the transaction was recorded.

Typical examples include drafting errors, assets being wrongly described or a document giving effect to a wider distribution than was ever intended.

However, it is not enough for trustees simply to show that a document is wrong. In order to obtain rectification, it must also be clear what the document should have said instead. The court will only rectify a document where the trustees can demonstrate with sufficient clarity both:

• that the document fails to reflect the intended transaction; and
• precisely how it should be corrected to give proper effect to that intention.

Rectification is not available where trustees misunderstood the tax consequences of a transaction they fully intended to undertake. In those cases, the document accurately records the intention at the time, even if the outcome was unexpected.

A recent Jersey decision, Re the C Trust (2025), illustrates this well. A deed mistakenly appointed the entire trust fund instead of a modest cash sum, contrary to the trustees’ clearly recorded intention. The court was therefore able to rectify the document to reflect the true transaction, avoiding severe unintended tax consequences.

As with claims based on mistake, a clear documentary trail is often decisive. Trustees should ensure that their records and instructions make it possible to identify not only that an error occurred, but exactly how the document ought to be amended.

Practical takeaways for trustees

Unintended tax consequences can in certain circumstances be reversed, but the availability of relief depends on how the issue arose and on the strength of the evidence. The appropriate remedy will turn on the facts of each case. Trustees who understand the available remedies and maintain clear records are best placed to respond effectively.

In summary:

• The availability of relief depends on how the tax problem arose, not simply its severity.
• Mistake, rather than relying on the rule in Hastings Bass, is generally a preferable remedy for Trustees as it avoids allegations of breach.
• Rectification can only assist in instances of faulty paperwork, not incorrect reasoning.
• Detailed records matter.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2026