To err is human; to forgive, divine
Trustees are only human, and it is possible to seek a rectification order where there has been a mistake – though it is probably less stressful and expensive for all concerned to get it right in the first place rather than relying on divine forgiveness in the High Court of Justice …
A family settlement held a significant number of shares in a listed company. In 2011, it became clear that a sale of the company was likely to happen. It would be in the family members’ interests if the shares ultimately to be sold were subject to entrepreneurs’ relief, thus reducing the capital gains tax charge from 28% to 10%.
Arrangements were put in place whereby the trustees sold sufficient shares to two beneficiaries to enable the entrepreneurs’ relief test to be met (both for the beneficiaries and indeed the settlements). Among other things, this test requires the selling shareholder to hold at least 5% of the nominal share capital in the company for at least 1 year prior to the sale.
Unfortunately, the trustees miscalculated. The beneficiaries, it turned out, did not end own at least 5% of the nominal share capital – they only held 4.97% each. This was insufficient to obtain entrepreneurs’ relief when the company was sold.
All parties sought to rectify the agreements on the basis of common mistake. In brief, this requires that the parties had a common intention that had been outwardly expressed and continued at the time any agreement was executed and, further, that the agreement did not in fact reflect that intention.
In this case, the intention of all the parties was quite plain – to transfer sufficient shares to meet the 5% nominal share capital test. It was only the calculation that was at fault. No doubt it was to everyone’s relief that the agreement was rectified.