THE Royal Court has cancelled a £7 million payout from a Jersey trust after a tax mistake left two beneficiaries facing a potential bill £2.3 million higher than expected.

The trustee agreed two distributions of £3.535 million to two UK-resident beneficiaries of the family trust in June last year in a bid to take advantage of a favourable UK tax scheme.

The trust held assets worth just under £10 million, originating from family money and income from businesses including a pharmacy chain and perfume distribution.

The plan was to distribute about £3.5m each to two UK-resident daughters of the settlor. The family believed they could use the UK’s Temporary Repatriation Facility, which would allow qualifying overseas income and gains to be brought into the UK at 12% tax rather than rates of up to 45%.

There was also some urgency: making the distributions before 30 June would save about £10,600 in trustee charges. The deeds were consequently prepared and executed at the end of June.

But just an hour after the fully signed deeds had been circulated, doubts emerged over whether the beneficiaries qualified for the scheme – potentially leaving them facing tax of up to 45% rather than the anticipated 12%.

The mistake meant their combined potential liability was £3.1m instead of around £850,000 – a difference of around £2.3m, which the Royal Court described as “significant” given that the trust held assets of just under £10m.

Updated tax advice, received the day after the payment was made, confirmed that the beneficiaries could not use the scheme because they had not previously used the required form of taxation.

The tax adviser subsequently concluded: “I am sorry – but it would appear that there is nothing further which we can do from a tax perspective.”

The trustee applied to the Royal Court to have the appointments set aside because they had been made under a fundamental mistake.

The court stressed that the arrangement was not an “aggressive tax mitigation strategy”, but a straightforward attempt to take advantage of a facility introduced by UK legislation.

It added that the extra tax HM Revenue and Customs would receive because of the mistake would effectively amount to a “windfall”.

The court declared both deeds void and of no effect from the time the payments were agreed.