The beneficiaries of a trust that engaged an offshore tax avoidance scheme that later saw its tax exemptions challenged by HMRC have had their appeal on the grounds of mistake rejected.
Tax avoidance scheme
The England and Wales Court of Appeal (EWCA) heard that the beneficiaries, part of the Bhaur family, entered an inheritance tax (IHT) avoidance scheme in 2006 with the Defendant, a solicitor (Mr O’Toole) who operated a tax advisory business under the name Aston Court.
The scheme – said to be an Asset Liberation Solution – saw the assets of their substantial property business placed into a new company, Safe Investments UK, with the family placed as shareholders, directors, and employees.
The new company was them transferred into an offshore subsidiary, Gooch Investments. The year after, the shares were transferred to a trust company in the British Virgin Islands, Equity Trust (BVI) Limited.
The shares were to be held by the offshore subsidiary as part of a First Staff Remuneration Trust, benefiting from which would be qualifying employees of Safe Investments, who were the children of Mr and Mrs Amarjit Bhaur.
The children would be able to benefit from distributions of the assets of the trust after their parents’ deaths – purportedly free from IHT.
HMRC challenge
In July 2010, HMRC challenged the scheme’s qualification for relevant tax exemptions under the Inheritance Act 1984 on the basis that the children might benefit from the trust.
While the dispute and subsequent tax consequences “have not formally been resolved”, Lord Justice Snowden said it will “very likely have seriously disadvantageous tax consequences for the Appellants” if HMRC have the better of the arguments.
The appeal
Mr Bhaur issued a claim in 2020 on the following grounds:
The Solution was unsuitable for the claimants, and the representations [by Aston Court that it was suitable for them] were false in that:
(a) The Solution was unsuitable for the claimants because at no time did any of the claimants have any intention or need to set up a trust to incentivise or reward employees, and had no employees who could lawfully benefit from such a trust.
(b) The claimants did not intend the Solution as a genuine part of the remuneration structure of their business, and had no idea that it would need to be presented to HMRC in that way.
(c) Aston Court intended, but did not inform the claimants, that the scheme would be presented to HMRC as if it was a genuine EBT when its true purpose was to shelter the claimants’ assets from UK taxes without any benefits to relevant employees.
Despite this, Mr Bhaur’s appeal was rejected unanimously by Snowden LJ alongside Lord Justice Arnold and Lord Justice Lewison. Snowden LJ said at [101]:
“This was […] a case in which Mr. and Mrs. Bhaur deliberately chose to implement what they knew to be a tax avoidance scheme which, to their knowledge, carried a risk of failure and possible adverse consequences.
Their mistake was to think that those adverse consequences could be avoided by the reversal of the transactions and the reclaim of the fees paid to Aston Court under the Fee Guarantee.
That mistake might well have had an important influence on their decision-making, and I do not lose sight of the fact that it may well have been the result of bad or misleading advice from Aston Court.
However, these factors do not alter the fact that in implementing the Scheme Mr. and Mrs. Bhaur knew there was a risk and decided to take it anyway.”
Snowden LJ added that it was of “considerable weight” to him that the scheme “was, on any objective view of the facts, an entirely artificial tax avoidance scheme”. He added at [105]:
“I fully accept that tax avoidance is not unlawful, but I agree with Lord Walker’s observations in Pitt v Holt at [135] that artificial tax avoidance is a social evil that puts an unfair burden on the shoulders of those who do not adopt such measures. In my view this is a very weighty factor against the grant of any relief.”
Real the full case: Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors [2023] EWCA Civ 534
