In Routier v HMRC [2019] UKSC 43 (16 October 2019), the Supreme Court, reversing the decision of the Court of Appeal, found that a donation to a charitable trust established in Jersey was exempt from IHT.
Mrs Coulter had died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes which were agreed to be exclusively charitable under English law.
HMRC considered that IHT relief for donations to charities (IHTA 1984 s 23) did not apply, as the Coulter Trust was governed by Jersey law. The appellants, who were Mrs Coulter’s executors, argued that s 23 was incompatible with TFEU art 63 which prohibits restrictions on the free movement of capital.
HMRC’s response was that art 56 had no application to this case, given that, although Jersey was not a part of the UK for the purposes of s 23, a movement of capital between the UK and Jersey should be regarded as an internal transaction taking place within a single member state. HMRC also argued that the restriction resulting from the adverse treatment of the Coulter Trust was in any event justifiable under EU law, since there was no mutual assistance agreement covering inheritance between the UK and Jersey.
The court observed that the decisions of the European Court of Justice in this area provide ‘a systematic and consistent approach to resolving issues such as the present’. ‘The question whether a 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.’ The court noted that, in two cases (Van der Kooy (Case C-181/97) and Commission v United Kingdom (Case C-30/01), the transaction was not regarded as internal to the member state concerned because the relevant rule of EU law did not apply in the associated territory. That was the case despite the fact that the territory was associated with the member state in question. The court concluded that, as EU rules on free movement of capital did not apply in Jersey, Jersey was a third country for the purpose of a transfer of capital from the UK.
The court then referred to the decision in Dreyfus [1956] AC 39, in which the House of Lords had held that ‘“trust established for charitable purposes only”, in the Income Tax Act 1918 s 37, must be interpreted as being implicitly limited to trusts which were governed by the law of some part of the UK and were subject to the jurisdiction of the courts of the UK’. It added that no such restriction existed on the face of s 23, which was therefore compliant with s 56. The only issue was therefore whether HMRC was right to apply the ‘Dreyfus gloss’ to the provision. The court found that art 56 was directly applicable in the UK so that the ‘Dreyfus gloss’ could not be applied to s 23 in situations falling within the scope of art 56.
Why it matters: This judgment puts an end to a long running judicial saga. It seems to considerably restrict the scope of the Dreyfus decision, which provided that only UK established trusts could benefit from charitable status. It also contains an interesting discussion on the relationship between the UK and ‘associated territories’ and the implications for transactions between the UK and such ‘associated territories’.
In Routier v HMRC [2019] UKSC 43 (16 October 2019), the Supreme Court, reversing the decision of the Court of Appeal, found that a donation to a charitable trust established in Jersey was exempt from IHT.
Mrs Coulter had died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes which were agreed to be exclusively charitable under English law.
HMRC considered that IHT relief for donations to charities (IHTA 1984 s 23) did not apply, as the Coulter Trust was governed by Jersey law. The appellants, who were Mrs Coulter’s executors, argued that s 23 was incompatible with TFEU art 63 which prohibits restrictions on the free movement of capital.
HMRC’s response was that art 56 had no application to this case, given that, although Jersey was not a part of the UK for the purposes of s 23, a movement of capital between the UK and Jersey should be regarded as an internal transaction taking place within a single member state. HMRC also argued that the restriction resulting from the adverse treatment of the Coulter Trust was in any event justifiable under EU law, since there was no mutual assistance agreement covering inheritance between the UK and Jersey.
The court observed that the decisions of the European Court of Justice in this area provide ‘a systematic and consistent approach to resolving issues such as the present’. ‘The question whether a 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.’ The court noted that, in two cases (Van der Kooy (Case C-181/97) and Commission v United Kingdom (Case C-30/01), the transaction was not regarded as internal to the member state concerned because the relevant rule of EU law did not apply in the associated territory. That was the case despite the fact that the territory was associated with the member state in question. The court concluded that, as EU rules on free movement of capital did not apply in Jersey, Jersey was a third country for the purpose of a transfer of capital from the UK.
The court then referred to the decision in Dreyfus [1956] AC 39, in which the House of Lords had held that ‘“trust established for charitable purposes only”, in the Income Tax Act 1918 s 37, must be interpreted as being implicitly limited to trusts which were governed by the law of some part of the UK and were subject to the jurisdiction of the courts of the UK’. It added that no such restriction existed on the face of s 23, which was therefore compliant with s 56. The only issue was therefore whether HMRC was right to apply the ‘Dreyfus gloss’ to the provision. The court found that art 56 was directly applicable in the UK so that the ‘Dreyfus gloss’ could not be applied to s 23 in situations falling within the scope of art 56.
Why it matters: This judgment puts an end to a long running judicial saga. It seems to considerably restrict the scope of the Dreyfus decision, which provided that only UK established trusts could benefit from charitable status. It also contains an interesting discussion on the relationship between the UK and ‘associated territories’ and the implications for transactions between the UK and such ‘associated territories’.
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