Two recent cases illustrate where evidentially: (i) breach of fiduciary duty; (ii) unlawful tax avoidance; and (iii) fraud, can all potentially intersect in a trust or probate dispute. Therefore, a breach of fiduciary duty claim against a non-resident trustee can trigger a tax investigation in the UK. See:

(a)        Van Zuylen v Whiston-Dew & Anor [2021] – see my blog, ‘Investment Fund Fraud – Jurisdiction of English court’ (Google ‘Carl’s Wealth Planning blog’ and use the search box to find). Judge Nicholas Thompsell stated:– ‘[The Defendant argued] that this court had no jurisdiction as the matters in question fell to be determined by the courts of St Kitts and Nevis under the terms applicable to the [2nd] Trust. … [The] point was utterly without merit given that the Claimant has not made any claim for breach of the [2nd] Trust and has never bound herself to any foreign jurisdiction. Her principal complaints against the Defendant were based on his deceit, breach of fiduciary duty, breach of contract and breach of the general prohibition under the FSMA. In addition, I have found that the [2nd] Trust, was used by the Defendant as an instrument of deceit and as such it should be ignored. … In El Anjou, the claimant was the victim of a fraudulent share-selling scheme … The fraudulent scheme involved the transfer of money through various jurisdictions and ultimately into a London-based property development project.
(b)        Reeves v Drew [2022], a contentious probate claim in which: (i) the Claimant’s counsel sought to prove that one of the witnesses [‘W’] (an accountant) was a ‘crook by reference to a [property] transaction [where] the purchase price was misstated in order to effect a tax fraud [and submitted that W] was a crook and his evidence should not therefore be believed [which was allowed] (para 108); and (ii) Judge Michael Green stated, ‘it may necessarily follow that a finding that the deceased did not know and approve the contents carried with it the strong implication that she engineered an extraordinary fraud … it is not necessary for the defendants to prove that this was what happened and that it was fraudulent or dishonest. … The way that the [solicitor] went about the preparation of the will was … quite possibly dishonest. … There could be serious consequences for [the solicitor] as a result of my findings. But it would not be right for me to speculate on this, particularly as the defendants do not allege and do not seek to prove that there was a fraud …’ [paras 344,347,348, 407 & 408].

There is no statutory definition of the role of a trust Protector [‘P’]. What P’s role is called is much less important than the powers the trust deed confers on the Protector. P can be given the right to settle disputes between the trustee and the beneficiaries. Therefore, P can e.g. mediate between two different classes of beneficiaries such as income and residuary beneficiaries in the event of a dispute or disagreement. P can also be set up as the ‘decision-maker’ rather than a mediator. 

The HMRC internal Trusts Settlements and Estates Manual states – TSEM10050 – Non-resident trusts: residence rules: professional trustees not resident in the UK – introduction and background states, ‘The rules that came into force on 6 April 2007 treat the trustees of a settlement as a single person, as distinct from the persons who may be trustees from time to time. The residence status of that single person (referred to below as the “body of trustees”) at any given time is determined in the first instance by the residence status of the persons who are trustees at that time:
·        If all the trustees are either resident in the UK or not resident in the UK, the residence status of the body of trustees follows that outcome.
·        If at any time at least one trustee is resident in the UK and at least one is not, the body of trustees is resident in the UK only if any settlor of the trust was resident, ordinarily resident or domiciled in the UK at any time when he or she introduced property into the trust.’

Therefore, could an offshore trust be treated as being resident in the UK for both income tax and CGT, where by virtue of the powers conferred on P under the terms of the trust, P is a ‘de facto’ trustee, and is resident in the UK, i.e. because P is a decision maker?

What concerns me, is whether a judge may one day conclude that where P behaves like a mediator, that even though mediators do not make decisions for parties in dispute, that by becoming actively involved in the dispute resolution process, P has stepped out of his conventional role as a Protector, and stepped into a role which has as its objective the making of a decision about the administration of the trust. In which case depending upon what P says and does, the boundary between P being either a decision maker or a mediator is blurred.

As Lewin on Trusts states in paragraphs 28-045 & 28-047 “A protector … is typically the holder of a group of powers or requirements of consent. The word is not a term of art … If the protector holds an office under the trust, it will ordinarily be impossible to construe the power or powers as beneficial: the protector will be there for the protection of the beneficiaries and his powers will be fiduciary. … The scope of the protector’s functions depends on the provisions, express and implied, of the trust instrument.”

While protection may involve advising mediation, it does not require a protector to be a mediator, and in sharp contrast to a mediator, P owes fiduciary duties toward beneficiaries in dispute who participate in mediation.

As far as I am aware, few trust administration professionals, i.e. TEP’s, have trained and become accredited as mediators. I have, and think there is a risk that if P is not a trained and accredited mediator, that he/she is not likely to know what they are doing. In which case if the court finds that P has crossed the line and become a decision maker (i.e. by in effect imposing a decision on the beneficiaries and/or trustees), then HMRC can conclude that the trust is UK resident i.e. if P is resident in the UK and the other connecting factors exist, because P has behaved as a de facto trustee. This is purely musing on my part. However, if I am right, this could bring billions into the UK tax net, which I think politically, would be popular.

‘[Even] trusts with powers exercised through a protector may be challenged as shams, particularly where they are exercised for the personal benefit of the settlors. … [With] respect to the taxation of offshore trusts by onshore jurisdictions – If the protector’s power is such that the trust is deemed to be managed and controlled by the protector and not the trustee, it is the protector’s residence that will determine the trust residence for purposes of taxation. This would jeopardize the trust where the protector is a resident of the onshore jurisdiction.’ Trusts and Related Tax Issues in Offshore Financial Law (2005), OUP, by Dr Rose-Marie Antoine. If the trust is challenged in litigation as being either a sham or an onshore trust, what planning rationale can a defendant provide to the court to explain why the settlor [‘S’] went to such lengths to give powers to a protector which S could legitimately have reserved to himself or herself, provided that S did not retain control over the trust?

If the reason for appointing P is that S decided to err on the side of caution and not tempt the court into finding that the trust was a sham, but that insufficient thought was given to the powers conferred on P and the tax residence of P, then while the court may find that the trust is not a sham, or an illusory trust, it could find that the trust is resident for income tax and CGT in the UK, provided all the connecting factors I have previously mentioned existed when S constituted the trust with cash or an asset, e.g. a luxury yacht or art collection.

Therefore, it is unwise for a Protector of an Offshore Trust to become involved in the mediation of an internal trust dispute.

I have been commissioned by Trusts & Trustees (Oxford University Press), to write an in-depth article about the ‘Mediation of International Trust Disputes’ which I am planning to write in July/August.

In the article I will also discuss:

(i) Common challenges to offshore trusts.

(ii) Connecting factors for tax.

(iii) The framework of applicable conflict of laws principles in litigation.

(iv) The opportunity that mediation presents to re-draft a trust deed that is no longer fit for purpose – which is a time-bomb waiting to go off when, e.g. the patriarchs of wealthy families in the gulf either lose capacity or die, and a succession battle results in litigation.

(v) The application of these issues to the mediation of disputes involving Islamic Finance, wealth planning, and family trusts.

If there are any particular issues you would like me to discuss, please send an email to carl@ihtbar.com.

Likewise, if you would like to receive PDF copies of my recent articles published in Taxation (Tolley) about the mediation of probate disputes, and the use of mediation as an estate and business succession planning process to enable an international family to put their house in order before a monumental event occurs.

‘Expert Mediation’ of Tax disputes? – Paragraph 16 of the HMRC Litigation and Settlement Strategy (the ‘LSS’) states, ‘Alternative Dispute Resolution (ADR), and more specifically facilitation or mediation, is a flexible dispute resolution tool available to HMRC which, in appropriate cases, can help HMRC and its customers resolve disputes (or reach key decision points) in a cost effective and efficient manner. The LSS applies to the resolution of all disputes through civil procedures. Therefore, any resolution of a dispute between HMRC and a customer, whether it’s resolution involved ADR or not, must accord with the terms of the LSS and specifically be a resolution which HMRC considers could reasonably be reached by a tribunal.’ While in principle any tax dispute may be resolved by either agreement or litigation, on its face, the LSS will not permit HRMC officers ‘to do deals.’ However, as Keith Gordon observes in paragraph 2.2.2 of the 5th edition of ‘Tax Appeals – Law and Practice at the FTT’ (2022), ‘In practice, deals can still be done, although it is usually necessary to show that the ultimate result can be reconciled with a possible outcome from the litigation (even if the justification for the outcome is not particularly logical).’ This is a question of mathematics. I.E if ‘A’ and ‘B’ are in dispute and A = 5 and B = 10, while a settlement for 7.5 is not possible (because that would be splitting the difference) a settlement for either 5 or 10, plus a proportion of costs would appear to be possible. What the Mediator needs to understand, is that the extent of flexibility depends upon the attitude of the officer and his/her willingness to reach an amicable settlement. In other words, these constraints are an opportunity for creative structuring of terms of settlement. Where there is a range of possible figures for tax due, HMRC will not settle by agreement for an amount which is less than it would reasonably expect to obtain from litigation, (the LSS paragraph 17). Therefore, the key to settlement is understanding the basis of that expectation. This is where an expert can assist the mediator and parties – see ‘Expert Mediation’ on the Mediation of ‘Probate & Trust Disputes’ page at www.ihtbar.com. Taking into account the decision in Wired Orthodontics Ltd v HMRC [2020] UKFTT 290 (TC), is it possible and practical to agree upon the appointment of an independent single-joint expert for the purposes of both Mediation and Litigation, i.e. provided the expert remains bound by mediation confidentiality following the Mediation?
I have been commissioned by Taxation (Tolley) to write an article in 2023 about the ‘Mediation of Tax Disputes’ and would be interested in hearing the views of tax partitioners about the Mediation of Tax Disputes. My contact details are set out on the ‘Consultation’ page at www.ihtbar.com.

‘In order to try to obtain further insights into the challenges that mediators encounter when working with parties and their advisers, we asked about the frequency with which they encountered particular behaviours within client negotiation teams. … This year, the need for more thorough preparation was far and away the most common piece of advice offered. In addition, a number of respondents highlighted the importance of remembering that negotiation in mediation is a process of persuasion. One mediator recommended parties to “think about what you can say or do that will help the other party walk towards you” whilst another made essentially the same point more colourfully: “You are trying to persuade the other side to say yes, not batter them down. No one likes to agree with someone who is punching them in the face. Therefore, you need to think beforehand and during the mediation about how you are going to encourage the other side to say yes and think from their perspective as to what they need, not yours”.’ See: CEDR 9TH Mediation Audit (2021): https://lnkd.in/ewu_s4mv

Mediation works best, where instead of rehearsing their case, participants invest in the process by preparing ‘to do a deal’ instead of going to war by developing a ‘settlement strategy’. Therefore, sufficiently in advance of the mediation, each participant needs to think about:
● The potential settlement zone.
● The known or estimated gap between what each participant wants.
● Their ‘BATNA’ (best alternative to a negotiated agreement, i.e. going to trial).
● How to close the gap and come away with a win/win solution compared to the costs and risks of litigation and proceeding to trial.

A good Mediation Strategy has realistic objectives. Therefore, where a party’s evaluation of merits and quantum is clouded by optimism, anchoring, sunken costs bias, and an attachment to specific e.g. luxury/sentimental estate assets, then specialist mediation counsel (who may be more detached than a party’s solicitor), can add value by educating the party about the merits of their claim/defence, realistic chances of success and the litigation risks. This may result in a critical evaluation of beliefs and expectations. If both parties undertake this exercise early on in their dispute, this increases the opportunities for settlement.

This will be discussed in my next article, for Trusts & Trustees (Oxford University Press) about the ‘Mediation of Probate and Trust Disputes’ which I am aiming to complete and submit in July, for publication later this year.