The Supreme Court held that a gift of United Kingdom assets to a charitable trust governed by Jersey law was entitled to inheritance tax relief. Because the EU rules on free movement of capital do not apply in Jersey, the transfer was a movement of capital to a third country, and a judge-made restriction confining relief to United Kingdom trusts could not be applied.
Mrs Beryl Coulter died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes agreed to be exclusively charitable under English law. The appellant executors were the trustees. They were domiciled in Jersey, and the will provided that the proper law of the Coulter Trust was Jersey law. The estate included United Kingdom assets of £1.7 million. If relief was refused, about £567,000 in inheritance tax was due.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
Section 23 of the Inheritance Tax Act 1984 exempts a transfer of value to the extent that it is attributable to property given to a charity. On 29 May 2013 HMRC determined that the gift did not qualify. That determination treated section 23 as limited to trusts governed by the law of a part of the United Kingdom, and treated Jersey as outside that limit.
The free movement argument
The executors relied on article 56 of the EC Treaty, the free-movement rule in force at the time of the gift. It covered movements of capital between member states and between member states and third countries. The question was where Jersey stood for this purpose.
HMRC argued that a movement between the United Kingdom and Jersey was internal to one member state. They also said that any restriction was justifiable because no mutual assistance agreement covering inheritance tax was in force between the United Kingdom and Jersey when Mrs Coulter died.
Why Jersey was a third country
Lord Reed and Lord Lloyd-Jones, with whom Lady Hale, Lord Carnwath and Lord Hodge agreed, held that Jersey is a third country for this purpose. The Channel Islands are Crown Dependencies, not part of the United Kingdom. Article 299(6) EC and Protocol 3 to the Treaty of Accession apply only limited EU rules to the Channel Islands. EU rules on free movement of capital do not apply in Jersey.
The Court of Justice’s decisions were treated as establishing a consistent approach: whether a territory is a third country depends on the legal context, and in particular on whether the relevant EU rules apply there. Where those rules do not apply, a transfer from the associated member state is not a purely internal transaction. Capital here moved from a member state in which article 56 applied to a territory in which it did not. The Court therefore declined to make a preliminary reference.
The restriction and why it could not be applied
Read on its face, section 23 does not distinguish between charities governed by United Kingdom law and charities governed by the law of another member state or a third country. The restriction came from the House of Lords’ decision in Camille and Henry Dreyfus Foundation Inc v Inland Revenue Commissioners. That decision treated the words “trust established for charitable purposes only” as limited to a trust governed by the law of some part of the United Kingdom and subject to the jurisdiction of its courts. Through the statutory definitions, the Court of Appeal had carried that gloss into section 23 and held that the Jersey trust therefore fell outside the relief.
For this transfer, article 56 prevented the domestic court from applying the judge-made restriction. Without it, the trust met the statutory requirements for relief. The Court considered the law applicable to the gift made on Mrs Coulter’s death in 2007.
The Court of Appeal should have reached that conclusion once it accepted that the Dreyfus restriction was incompatible with article 56. It should not have considered a hypothetical requirement that a mutual assistance agreement be in force, or read such a requirement into section 23. Neither section 23 nor the income tax definition of charity imposed that condition. The Court of Appeal had itself found that HMRC did not need a mutual assistance agreement on these facts: HMRC accepted that the trust’s objects were charitable under United Kingdom law and did not suggest that the Jersey courts would fail to enforce them.
Verdict: The Supreme Court unanimously allowed the executors’ appeal. Refusing the exemption for the gift of UK assets to the Jersey charitable trust breached article 56 EC. The statute did not impose a mutual-assistance agreement requirement.
Source: Routier and another v Commissioners for Her Majesty’s Revenue and Customs [2019] UKSC 43
