Can the validity of an offshore trust be challenged in the English court by HMRC seeking a determination of the applicable law?

Validity is resolved by determination of the proper, i.e. governing law. There is little case law on the choice of law rules for trusts. Determination of the proper law of a trust is an undeveloped subject. The Hague Convention on the Recognition of Trusts simplified the issue. However, there is residual uncertainty about common law rules. The modern view is that the proper law of the trust is the law chosen by the settlor, as expressed or implied in the terms of the trust. Where there is no express choice, the emerging doctrine is that the trust is governed by the law with which it is ‘most closely connected’.
Uncertainty may also surround the question of which particular aspects of a trust the term ‘proper law of the trust’ applies to. For the purposes of determining the choice of law, several distinct trust issues require consideration:
(i)          whether the trust instrument is valid according to the appropriately chosen law;
(ii)        whether the trust itself is valid;
(iii)       the validity of the transfer of the assets;
(iv)       the capacity of the settlor to create a trust; and
(v)        the administration, construction, variation and interpretation of the trust.

The question of the proper law of an offshore trust remains even in the face of an express choice of law clause. Therefore, the validity and effectiveness of a clause drafted in the 1970s, may now become contentious. It is also open to the English court to hold that the choice of offshore law offends public policy because of its hybrid and more flexible trust law features. While the general rule is to give effect to an express choice of law based upon the analogical premise of the ‘freedom to contract’, there are reservations, because it is logical to expect that such limitations for trusts will be on similar principles to those for contracts. On the conflict of law rules governing contracts, limitations are based upon the choice being:
(i)         bona fide;

(ii) legal;
(iii) not contrary to public policy;
(iv)       connected with the contract; and
(v)        meaningful.

Therefore, an offshore trust set up 50 years ago on the cheap, on standard instead of legally robust ‘bespoke’ terms, is potentially a sitting duck for a revenue authority, i.e. if the validity and applicable law of the trust can be challenged as a result of inadequate drafting. This potential line of attack is also connected to unlawful tax avoidance and tax fraud, which I will discuss in my next article for ‘Taxation’ (Tolley), which I am planning to write in 2023 entitled, ‘What is the jurisdiction of the English court where breach of fiduciary duty by a non-resident trustee amounts to unlawful tax avoidance or fraud?’

See also:

The taxation of trusts: a review – summary of responses (

Bermuda’s firewall legislation and its recent trust law reforms. | Carey Olsen

Admissibility of evidence in Tax Appeals

The FTT is not bound by the traditional mantra of statutory and common law principles of admissibility. As a general rule, all evidence is admissible, whether or not it would ordinarily be admissible in a civil court. However, overriding common law principles, e.g. protection of legal professional privilege are not curtailed by FTT r.15(2)(a) because the FT must act within the framework of the Human Rights Act. The same applies in the UT.

A Tax Appeal will often involve questions of evidence, e.g.
(i)         whether a taxpayer was carrying on a trade;
(ii)        the nature of a transaction;
(iii)       valuation of goods and services;
(iv)       whether a non-incorporated UK company was centrally managed and controlled in the UK by its directors and/or shareholders; and
(v)        whether the accounting treatment for an item of expenditure is correct.
FTT Rule 15(2) states:
‘(2) The Tribunal may— (a) admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom; or (b) exclude evidence that would otherwise be admissible where— (i) the evidence was not provided within the time allowed by a direction or a practice direction; (ii) the evidence was otherwise provided in a manner that did not comply with a direction or a practice direction; or (iii) it would otherwise be unfair to admit the evidence.’
The legal test of admissibility is ‘relevance’, and there is a presumption that all relevant evidence should be admitted unless there are compelling reasons to the contrary, Mobile Export 365 Ltd v. Revenue and Customs Commissioners [2007] and Atlantic Electronic v. Revenue and Customs Comrs [2013].
Application of r.15(2) is the subject of guidance in HMRC v. IAC Associates [2013]. Nugee J observed, ‘… one starts with asking the question whether the evidence is admissible. It is admissible if it is relevant. It is relevant if it is potentially probative of one of the issues in the case. One then asks, notwithstanding that it is admissible evidence, whether [there] are good reasons why the court (or tribunal in this case) should nevertheless direct that it be excluded.’
In Revenue and Customs Comrs v. Atlantic Electronics Ltd [2013], one of the issues before the Court of Appeal was whether the admission of the material by the Upper Tribunal was just, fair and proportionate. Ryder LJ (with whom Arden LJ agreed) stated that:
‘HMRC wish to have [a certificate of conviction and the indictment and a note of the prosecution opening] admitted so that they can explain to the FTT the detailed background rather than merely the technical relevance of the convictions to their case. … The UT adopted the correct approach to the admission of the materials in question. It assessed whether the evidence is relevant and applied the presumption that all relevant evidence should be admitted unless there is a compelling reason to the contrary. … The prejudice to the Revenue in not being able to rely on the note of the prosecution opening is clear once the purpose of the admission of the material is analysed i.e. the dishonest and knowing participation of [X] as a contra trader.’ The UT was therefore entitled to decide to admit the disputed evidence.

Restitution of art stolen in England [‘SA’] purchased [by ‘P’] in a foreign country which recognises transactions that pass title in stolen chattels to a good faith purchaser

This is discussed in my evolving essay ‘Art Restitution Litigation in the English Court’ on the ‘Mediation of Art & Cultural Heritage Disputes’ page at

A novel legal theory occurred to me over the weekend when I started to write the essay, which runs as follows.

If P delivers the SA to a dealer [‘D‘] in London for sale, and under their contract D acquired a proprietary interest in the SA, then under the Limitation Act 1980 [‘LA’], could possession of the SA by D constitute a conversion ‘related to the theft’ of the SA which took place in England?

Under the LA, ‘Once … A bona fide purchaser acquired the chattel, and six years has run from the date of his acquisition, the owner cannot sue a person who acquires the chattel after the date of the bona fide purchaser’s acquisition, even if he is not himself a bona fide purchaser … Any conversion which follows the theft before the owner recovers possession is treated as “related to the theft” except a purchase in good faith or any acquisition subject to such a purchase; section 4(2).’ Arden J in De Preval v. Adrian Alan Ltd [1997]. ‘It does seem to be possible to identify, from that legislation, a public policy in England that time is not to run either in favour of the thief nor in favour of any transferee who is not a purchaser in good faith. The law favours the true owner of property which has been stolen, however long the period which has elapsed since the original theft.’ The City of Gotha [1998].

It therefore appears, that unless D can rebut the presumption under s.4(2) of the Limitation Act 1980 that the purchase by P was related to the theft, i.e. by proving that under English Law P had purchased the SA in good faith (for which purpose the court may take into account the factors mentioned by the judge in De Preval) , then the carve-out provided for in s.4(2) (i.e. that ‘if anyone purchases the stolen chattel in good faith neither the purchase nor any conversion following it shall be regarded as related to the theft’) is not engaged.

In other words, unless D can prove that P acquired the stolen painting in good faith in the foreign country where he purchased it, which arguably is a question to be decided by applying English Law to determine ‘good faith’, that D will fail at trial to discharge the burden of proof under s.4(2) of the Limitation Act 1980.

In which case, the first good faith purchase following the theft of the SA in England, took place when the painting was delivered by P into D’s possession in London.

Therefore, if this occurred less than six years ago, time is running under the Limitation Act for the bringing of a claim in conversion against D (who is in possession of the SA in London). 

Art & Cultural Heritage Restitution Litigation in the United States (‘US’) – Limitation periods.

US law protects the interests of the original owner of art unlike any other system of law. In the case law and statutes of many US jurisdictions, three main approaches to the question of the running of time under limitation legislation may be discerned:
(i)           an ‘actual discovery’ rule (as provided for in California);
(ii)          the ‘demand and refusal’ rule (applied by the New York courts); and
(iii)         the ‘discovery or due diligence’ rule (in most other jurisdictions).
In international property law, which governs the question of the law applicable to in rem relations, the principle of lex rei sitae, is widely recognised. According to this principle, the validity of the transfer of the tangible movable and its effect on the proprietary rights of the parties thereto and those claiming under them in respect thereof, are governed by the law of the country where the movable is at the time of the transfer (lex situs).
If the object is moved from one jurisdiction to another, this leads to a change in jurisdiction with regard to property law, with the consequence that the law of the new situs of the object is decisive concerning existing rights of possession and ownership, as well as other in rem rights. #litigation#art#law In accordance with the situs rule, the law of the new situs, also decides whether, under what conditions and with what effect rights in stolen property can be acquired.
There has been a noticeable change in US conflict laws as applied in cases over the past 15 years, signalling a gradual departure from the perceived stricture of the situs rule and toward a more flexible approach, that of the ’most significant relationship’ test.
When confronted with the possibility of a transfer under civil law, US courts have shown noticeable reluctance to apply foreign law to cases concerning stolen property.
In two cases, the landmark Menzel v. List and the De Weerth saga, the question of the transfer under foreign law was not even raised, facilitating the application of US law and ignoring the fact that both paintings had gone through Parisian galleries and had been kept there for some time prior to their subsequent transfer in New York.
In two other cases, Elicofon and Goldberg a potential transfer of title under civil law had been discussed, yet in both cases the courts in the end chose to apply the ‘most significant relationship’ test instead of the lex situs rule, thus enabling them to apply local state laws in both cases.