UK Supreme Court holds testamentary charitable gifts to Jersey were entitled to inheritance tax relief

In Routier and another v Commissioners for Her Majesty's Revenue and Customs [2019] UKSC 43, the UK Supreme Court overturned an earlier Court of Appeal ruling and held that a testamentary gift of assets in the UK to a charitable trust in Jersey was entitled to inheritance tax ("IHT") relief. The decision turned on whether EU rules prohibiting restrictions on the free movement of capital applied to transfers of capital between the UK and Jersey and in this case it was held that they did, and that the refusal to grant IHT relief was an unjustified restriction on that free movement. While the future relevance of this judgment is subject to the outcome of Brexit negotiations, it provides in the meantime helpful clarification on the English courts' approach to determining the IHT liability of UK gifts to overseas territories.

Background

The appellants were the executors of Mrs Coulter, who died in Jersey in 2007, leaving her £1.7 million residuary estate (which included substantial assets in the UK) on trust for charitable purposes (the "Coulter Trust"). The will specified the Coulter Trust was to be governed by Jersey law although it was subsequently amended to make the trust's proper law the law of England and Wales. In 2014, the Coulter Trust was registered as a charity under English law.

In 2013, HMRC determined that Mrs Coulter's gift to the Coulter Trust did not qualify for relief from IHT in relation to charitable gifts provided by section 23 of the Inheritance Act 1984 ("ITA 1984"). HMRC's opinion was based on the House of Lord's decision in Camille & Henry Dreyfus Foundation Inc v Inland Revenue Comrs [1956] AC 39 which held that the phrase "trust established for charitable purposes only" in section 37 of the Income Tax Act 2018, must be interpreted as being implicitly limited to trusts which were governed by the law of some part of the UK. HMRC's position was that the "gloss" placed on the language in Dreyfus also applied to section 23 of ITA 1984. On the basis that Jersey was not part of the UK for the purposes of section 23, it followed that relief was not available and IHT of around £567,000 was therefore due.

The executors challenged HMRC's decision in the High Court and then the Court of Appeal, losing in both instances. The Court of Appeal accepted HMRC's interpretation of section 23 of ITA 1984 above.

On appeal, the executors argued that HMRC's interpretation of section 23 of ITA 1984 was an unlawful restriction on the free movement of capital between EU member states and third countries. The executors relied on article 56 of the Treaty Establishing the European Community ("EC") (now article 63 of the Treaty on the Functioning of the European Union) which provides that "[w]ithin the framework of the provisions set out in this chapter, all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited".

Decision

In its judgment, the Supreme Court considered:

1.     whether Jersey forms part of the UK or is a third country for the purposes of article 56 EC, and, if the latter,

2.     whether HMRC's refusal of relief under section 23 of ITA 1984 was nonetheless justifiable under EU law.

In relation to the first question, the Supreme Court noted that Jersey is not an independent state in international law and that the UK Government is responsible for the international relations and the defence of the Channel Islands. However, the Supreme Court held (referring to the Court of Justice's decision in Prunus SARL v Directeur des services fiscaux (case C-384/09) [2011] I-ECR 3319; [2011] STC 1392) that whether an overseas territory is to be regarded as a third country is context specific and will depend on whether, under the relevant Treaty of Accession and supplementary measures, the relevant provisions of EU law apply to that territory. For the purposes of the Treaty provisions which apply to those territories, they should be treated as part of the EU; but for the purposes of Treaty provisions which do not apply in those territories, they should be treated as third countries. Considering the relevant provisions of EU law, the Supreme Court held it was clear the EU rules on free movement of capital do not apply in Jersey. Therefore Jersey is to be considered a third country for the purposes of a transfer of capital from the UK.

In light of the above, it followed that the EU rules prohibiting restrictions on the free movement of capital applied for the purposes of capital transfers between the UK and Jersey, and that HMRC's decision to refuse relief under section 23 of IHT 1984 was a restriction on that free movement.

In relation to the second question, the Supreme Court found that the restriction HMRC placed on relief from IHT to trusts governed by the law of a part of the UK (the "Dreyfus gloss") could not be justified under EU law. Article 56 EC is directly applicable as law in the UK and must be given effect in priority to inconsistent national law, whether judicial or legislative. On its face, section 23 of IHT 1984 does not impose any restriction on the free movement of capital. In particular, it does not discriminate between gifts to charities governed by the law of the UK and gifts to charities governed by the law of other EU member states or third countries. Since it was accepted by HRMC that the Coulter Trust's purposes were charitable under English law, it therefore qualified for IHT relief. It was irrelevant for the purposes of section 23 of IHA 1984 that the trust was not governed by the law of a part of the United Kingdom.

Comment

The Supreme Court's judgment provides helpful clarification for individuals in the UK who have made testamentary gifts to charities in Jersey by confirming that IHT relief applies. While the decision is not of direct application to gifts from the UK to other overseas territories, it confirms that the question of whether the territory is to be regarded as a third country for the purposes of article 56 EC will depend on an analysis of the terms of the EU rules and which EU rules apply, and not the proximity of the ties between a member state and the territory in question.

That said, individuals and advisers considering charitable gifts to overseas territories should keep such plans under review as the future applicability of this decision may vary following the UK's departure from the EU.