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Legacy to Jersey trust is exempt from UK inheritance tax, says Supreme Court

Thursday, 17 October, 2019

The UK Supreme Court has ruled that a legacy left by a Jersey resident to a Jersey charitable trust is exempt from a GBP600,000 UK inheritance tax (IHT) charge.

The case arose from the will of Beryl Coulter, who died in 2007. She left her GBP1.7-million UK estate to a trust to provide housing for the elderly in Jersey, where she lived. Her executors duly claimed the charitable exemption from IHT on this legacy, but while HMRC agreed that if this were a trust governed by UK law it would be free of IHT, it alleged that a Jersey-based trust did not qualify.

HMRC's opinion was based on the House of Lords ruling in the Dreyfus Foundation case of 1956. This affirmed that the phrase 'trust established for charitable purposes only', as used in the Income Tax Act 1918, contained an implicit limitation such that trusts only qualify if they are governed by the law of some part of the UK. HMRC interpreted this as meaning that Beryl Coulter's trust is not a charity for UK tax purposes.

Mrs Coulter's executors challenged this decision in 2014, but lost in the England and Wales High Court. They then took the case to the England and Wales Court of Appeal (EWCA), which also ruled against them, considering the 60-year old Dreyfus judgment as correct, even though the 1918 Act had since been superseded by the Inheritance Tax Act 1984 (IHTA 1984). The EWCA judge relied on the 'Barras principle' that, where an act uses a form of words with a previous legal history, this may be relevant to its judicial interpretation. She considered that parliament must have been aware of the way the phrase 'body of persons or trust established for charitable purposes only' had been interpreted in Dreyfus, and must have intended that the phrase should have the same meaning in s.23 IHTA 1984.

However, the Coulter executors had a second argument. This was that s.23 IHTA 1984 as construed by HMRC would constitute an unlawful restriction on the free movement of capital between European Union Member States and third countries, and that Jersey is a third country for these purposes.

HMRC's response was that Jersey cannot be treated as a third country within the meaning of the EU treaties, and even if it could, a restriction on the movement of capital was justified in this case because of the practical difficulty of supervising the activities of foreign charities. At the time, there was no mutual assistance agreement between the UK and Jersey, and in 2017 the EWCA accepted this argument and again rejected the Coulter executors' appeal.

The dispute was accordingly referred to the Supreme Court, where the Coulter executors were represented by law firm Irwin Mitchell. The court has now unanimously decided in their favour, agreeing that Jersey was a third country, that the principle of free movement must be applied, and that the EWCA had been wrong to accept HMRC's position that an IHT charge was justified (Routier v HMRC, 2019 UKSC 43).

In its ruling, the Supreme Court made use of the European Court of Justice's (ECJ’s) decision in Prunus SARL v Directeur des services fiscaux (Case C-384/09, 2011, I-ECR 3319), in which the ECJ had held that the British Virgin Islands were to be treated as third countries. That determined that Jersey was to be considered a third country for the purpose of a transfer of capital from the UK, that EU rules on the free movement of capital applied, and that the refusal of relief under s.23 IHT 1984 was a restriction on that free movement.

Moreover, that restriction was not imposed by s.23 itself but by the 'judicial gloss' in the Dreyfus Foundation case, and was not justifiable. 'There can be no doubt that the Dreyfus gloss ... is incompatible with Article 56 [of the EU Treaties]', said the Supreme Court. 'It is plain that the restriction of relief from inheritance tax to trusts governed by the law of a part of the United Kingdom cannot be justified under EU law ... Article 56 is directly applicable and must be given effect in priority to inconsistent national law, whether judicial or legislative in origin.'

'We considered that the inheritance tax exemption for trusts that are clearly charitable should apply in Jersey as it does in the UK', commented Irwin Mitchell partner Anthony Nixon TEP. 'HMRC has for many years interpreted the charity exemption for a gift to a trust for charitable purposes as requiring the trust to be subject to the jurisdiction of the UK courts. The Supreme Court has confirmed our view that HMRC was wrong.'

Sources