No reversal of ‘evil’ artificial tax avoidance scheme

In Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors [2022] EWCA (Civ) 534, an IHT-saving property partnership incorporation scheme involving a complex offshore Employee Benefit Trust could not be reversed on the grounds of a mistake about its tax consequences. It was highly artificial tax avoidance which Mr Bhaur decided to enter into despite knowing the risk of a HMRC challenge.

Mr and Mrs Bhaur built up a property partnership of 35 properties. They Incorporated the business retaining legal title to all the 35 properties personally.

• To avoiding Inheritance Tax (IHT) they then embarked on a complex set of transactions over the course of several years involving Employee Benefit Trusts (EBTs), offshore companies and the transfer of the beneficial ownership of the properties offshore
• The EBTs excluded Mr and Mrs Bhaur. Younger family members were able to benefit.
• In 2016, the trustees proposed making payments to Mr and Mrs Bhaur and their two sons, described as 'income benefits' on the basis that the trust terms provided that benefits must be paid to employees and they had not been so far paid.
• Mr and Mrs Baur challenged the proposal due to the resulting substantial tax liabilities and the family refused to accept the payments.
• As a result, the trustees resolved to dissolve the company now holding the trust assets, bring the trust to an end and transfer all assets to the default trust beneficiary, the National Society for the Prevention of Cruelty of Children (NSPCC).
• The claimants asked that either the first and second trust be set aside on the grounds of mistake or, that the new structure be set aside as a sham and the appointment to the NSPCC be found invalid.
• The High Court dismissed the case and refused to set aside the scheme: they found that the trusts had been properly constituted and Mr Bhaur had not made any mistake in entering the scheme even though he did miscalculate the tax consequences if the scheme went wrong. The Bhaurs appealed.

The Court of Appeal also dismissed the Bhaur family’s appeal:

• Mr Bhaur knew that the scheme could be challenged by HMRC and, at the very least, that there was a risk that the financial consequences of the scheme failing would not be entirely neutral and might be worse than the potential Inheritance Tax which could have applied without the scheme. He made a conscious decision to implement the scheme anyway.
• The scheme was an entirely artificial tax avoidance scheme amounting to tax evasion. Whilst tax avoidance is not unlawful, artificial tax avoidance is a 'social evil' that puts an unfair burden on those who do not enter into it and this was a factor which weighed heavily against the granting of any relief.
• Even on the basis that the Bhaur family were not complicit in the dishonesty of the scheme promoters, it would not be unjust or unconscionable to refuse equitable relief and to leave the consequences of the Appellants' mistaken belief uncorrected.

Useful guides on this topic

Rectification of Trustee mistakes
What happens when trustees make mistakes? Can the court rectify them? When will they agree to rectification?

Non-resident trusts
When is a trust non-resident? What are the UK tax implications of a non-resident trust?  What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?

Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Incorporation of a property partnership
Step by step guide

External link

Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors [2022] EWCA (Civ) 534