Analysis
C died in 2007 in Jersey, leaving her residuary estate on trust (the trust) for purposes that were agreed to have been exclusively charitable under English law. C directed in her will that the proper law of the trust was the law of Jersey. The appellants, who were domiciled in Jersey, were appointed to be C’s executors and the trustees of the trust. C’s estate included assets in the United Kingdom amounting to £1.7m. In 2010 the appellants retired as trustees (but not as executors) and were replaced by a UK resident trustee. C’s will was then amended so as to make the proper law of the Trust the law of England and Wales and, in 2014, the Trust was registered as a charity under the law of England and Wales.
Her Majesty’s Revenue and Customs (HMRC) determined that C’s gift to the trust did not qualify for exemption from inheritance tax under s23 of the Inheritance Tax Act 1984 (s23), on the ground that relief under the section (which would have amounted to about £567,000) was limited to charitable trusts governed by the law of a part of the United Kingdom (UK), which did not include Jersey, following Camille & Henry Dreyfus Foundation Inc v Inland Revenue Comrs [1956] AC 39 (Dreyfus). The appellants appealed against the determination on the basis that it was incompatible with article 56 of the Treaty Establishing the European Community (article 56), which was replaced by article 63 of the Treaty on the Functioning of the European Union, which prohibited restrictions on the free movement of capital between EU member states and between member states and third countries. HMRC argued, firstly, that article 56 had no application as, although Jersey was not part of the UK for the purposes of s23, a movement of capital between Jersey and the UK was an internal transaction within a single member state; and, secondly, that the restriction of relief for the tax was justifiable under EU law as, on the date of C’s death, there was no mutual assistance agreement in force between Jersey and the UK covering inheritance tax.
As well as HMRC’s acceptance that the objects of the trust were charitable for the purposes of UK law, it was common ground that (a) article 56 applied in the United Kingdom but did not apply in Jersey, as Jersey was not required to comply with its provisions; (b) article 56 did apply to gifts to charities; and (c) the limitation of tax relief on a gift to the trust would, if article 56 were engaged, amount to a restriction on the free movement of capital. As Jersey was not a member state, the gift to the trust was not a movement of capital between member states and the issue turned on whether Jersey was to be regarded as a third country for the purposes of article 56.
Held:
1) Did Jersey form part of the UK for the purposes of article 56 EC?
The EU rules on free movement of capital did not apply in Jersey. Where capital moved from a member state, where article 56 applied, to a territory where it did not, that could not be considered a purely internal situation. Jersey was therefore to be considered a third country for the purpose of a transfer of capital from the United Kingdom: Prunus S ARL v Directeur des services fiscaux, (Case C-3 84/09) [2011] I- ECR 3319; [2011] STC 1392, followed.
2) Was the refusal of relief under section 23 in respect of C’s gift of her residuary estate to the Trust is justifiable under EU law?
The words of s23 did not impose any restriction on the free movement of capital; it particularly did not discriminate between gifts to charities governed by the law of the United Kingdom and gifts to charities governed by the law of other EU member states or third countries. It was on that basis entirely compliant with article 56. The judicial gloss in Dreyfus on the meaning of the phrase ‘trust established for charitable purposes only’ in s23, limiting its application to trusts governed by the law of some part of the United Kingdom and subject to the jurisdiction of the courts of the United Kingdom, imposed a restriction that was incompatible with article 56. Therefore, the gift by C to the trust qualified for relief under s23 and there was no need to consider the arguments of HMRC as to any requirement for a mutual assistance agreement to be in place.
JUDGMENT REED LJ AND LLOYD-JONES LJ: (with whom Hale LJ, Carnwath LJ and Hodge LJ agree): [1] The appellants in this case are the executors of Mrs Beryl Coulter, who died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes which are agreed to be exclusively charitable under English law. The appellants were appointed under Mrs Coulter’s will as the …Continue reading "Routier & anr v HMRC [2020] WTLR 281"