On 16 October 2019 the Supreme Court released its judgment in Routier v HMRC. The court determined that the EU principle preventing restrictions of the free movement of capital applies to gifts of UK assets to charities in Jersey. Accordingly, persons making such gifts are entitled to inheritance tax relief in the same way as they would be if they made such a gift to a UK-based charity.
The case relates to a gift of the residuary estate of Beryl Coulter, following her death in 2007, to the trustees of the Coulter Trust, a trust governed by Jersey law.
The court had to determine whether:
- Jersey forms part of the United Kingdom for the purposes of Article 56 of the Treaty Establishing the European Community, which prohibits restrictions on the free movement of capital (now Article 63 of the Treaty on the Functioning of the European Union); and
- the refusal of inheritance tax relief under Section 23 of the Inheritance Tax Act 1984 in respect of Mrs Coulter's gift to the Coulter Trust was justifiable under EU law.
On the first point, the Supreme Court concurred with the Court of Appeal that Jersey is to be considered a third country for the purpose of a transfer of capital from the United Kingdom. In this case, capital had moved from a member state where Article 56 applies to a territory where it does not (Jersey) and that could not be regarded as an internal matter governed by UK domestic law.
On the second point, the court determined that the correct conclusion was that Section 23 of the Inheritance Tax Act should be applied without additional wording or conditions in order to comply with Article 56. There was no need for a mutual assistance agreement to have been in force between the United Kingdom and Jersey at the time of Mrs Coulter's death.
Accordingly, the Supreme Court allowed the executors' appeal on the basis that the refusal of inheritance tax relief on that gift under Section 23 of the Inheritance Tax Act was in breach of Article 56.
The decision has several interesting implications (the future applicability of which may vary depending on the terms of the United Kingdom's proposed departure from the European Union). Clearly, it is helpful for individuals and others in the United Kingdom that have made gifts to charities in Jersey, elsewhere in the Channel Islands and to other third countries, as it is now clear that inheritance tax relief applies. The decision may give rise to applications to Her Majesty's Revenue and Customs (HMRC) for tax relief on gifts that have previously been denied such relief on the basis of the Court of Appeal decision in Routier v HMRC or earlier interpretations of the applicable law.
In reaching its decision, the Supreme Court considered European Court of Justice decisions in this area. As such, beyond the specifically charitable aspect, the decision may be of broader interest in Jersey and elsewhere in the Channel Islands and other overseas territories. It provides a review and confirmation of the status of such jurisdictions in relation to the United Kingdom and the European Union. Depending on the outcome of the current Brexit negotiations, this could be of largely historical interest. However, if an agreement is reached between the United Kingdom and the European Union before withdrawal, it is likely that the European Union's relationship with the Channel Islands, Isle of Man and other overseas territories may continue on a similar basis to now. Clearly, this is a constantly developing situation.
For UK advisers, the case serves as a salutary reminder of the need for careful tax planning at the earliest opportunity. While the decision means that the Coulter Trust will now receive inheritance tax relief under Section 23 of the Inheritance Tax Act, the costs that have arisen in taking the case to the Supreme Court could perhaps (with the benefit of hindsight) have been avoided by pre or post-death planning.
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