The Supreme Court has ruled that a deceased woman's gift to a charity in her native Jersey is exempt from inheritance tax, overturning previous decisions. It has significant implications for trusts in the island. Lawyers involved comment on the case.

Earlier last week, the Supreme Court in London ruled in favour of law firm Irwin Mitchell, stating that a gift by will to a charitable trust subject to the law of Jersey is exempt from inheritance tax. The firm said it successfully appealed a High Court judgment and two Court of Appeal judgments that the executors of Mrs Coulter’s estate, Peter Routier and Christine Venables, must pay nearly £600,000 in inheritance tax on the estate given to a charitable trust in Jersey.

The commentary comes from Anthony Nixon, partner (tax, trust and estates) and Clementine Burch, senior association solicitor, commercial litigation, at Irwin Mitchell. The editors are pleased to share these comments. They do not necessarily endorse all views of outside contributors and invites readers to respond. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

The Supreme Court judgment in Routier & Venables v HMRC
The Supreme Court, in a judgment handed down on 16 October 2019, has ruled that the late Beryl Coulter’s generous gift to fund housing for the elderly in her native Jersey is exempt from inheritance tax (IHT). This overturns previous decisions by the High Court and (in two separate judgments) the Court of Appeal that the IHT exemption did not apply because the charity had no connection with the UK. 

So we have finally, and successfully, reached the end of what has been a long story.

Mrs Coulter’s gift and IHT
Mrs Coulter died back in October 2007. She had lived in Jersey all her life, and wanted her and her late husband’s substantial assets to benefit the elderly of her home parish, St Ouen. There is no doubt that, had she been English, leaving a will with the same objectives for her home parish in, say, Sussex, her gift would have been free of IHT. She was domiciled in Jersey, so it was only her UK assets that fell into IHT. But since she had a portfolio of UK quoted investments worth some £1.8 million ($2.31 million), the IHT at stake was no small amount.

Sadly, our firm was not involved until nearly three years after Mrs Coulter’s death.

The meanings of “charity” and “charitable”
We began our appeal against HMRC’s ruling that Mrs Coulter’s UK estate did not qualify for the charity exemption by arguing that there was no restriction to the UK in the wording of the statute itself. 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 were wrong. HMRC’s interpretation was based on a case called “Dreyfus” which came before the Supreme Court’s predecessor, the House of Lords, in 1956. 

The House of Lords decided that the word “charity” could apply only to bodies of persons or trusts “established” in the United Kingdom. But it is clear from other case law that “charitable purposes” can be carried on anywhere in the world. If this were not the case, how could international charities such as Oxfam or the Red Cross carry on charitable work outside the UK? The Supreme Court effectively agreed with us on this point, because of their main finding that the “Dreyfus gloss” on the wording of the statute must, because of European law, be ignored.

European Union Law – the free movement of capital
The right to free movement of capital is a core principle of European law. 

It applies not only between EU Member States, but also between Member States and third countries (effectively anywhere else in the world). Cases in the EU Court of Justice have consistently ruled that giving a tax benefit to those in one Member State which is not given, in equivalent circumstances, to those outside that Member State breaches the principle of free movement. A restriction of this kind is only lawful if it can be justified. 

HMRC began by arguing that free movement of capital was not engaged between the UK and Jersey, because Jersey was, for these purposes, part of the UK, and not a third country. In its second hearing the Court of Appeal dismissed this argument, helped by support for our case from the Attorney General of Jersey. HMRC’s second argument was that the restriction to UK charities (the “Dreyfus gloss”) was justified by the need for “effective fiscal supervision”, because, at the time, there was no agreement for mutual assistance between the UK and Jersey.

The Court of Appeal agreed with HMRC that it was lawful for free movement of capital to be restricted on these grounds and dismissed our case.

Why we appealed to the Supreme Court
We considered that the ruling from the Court of Appeal on HMRC’s second argument did not take proper account of the EU case law. 

While some EU cases had found it justifiable for member states to restrict tax reliefs to internal situations, where there was no provision for mutual assistance, we could not find a case in which the EU Court of Justice accepted a restriction of this kind where the national legislation had not specifically provided for it. So we appealed the Court of Appeal’s decision on this point. Meanwhile, HMRC argued that the Court of Appeal had been wrong to rule that Jersey was a “third country”.

What the Supreme Court has decided
Much of the Supreme Court’s judgment concerns the question of whether Jersey is a third country.

The Court of Appeal’s ruling on this point was affirmed: Jersey is a third country, so that the principle of free movement must be applied. The Supreme Court went on to agree with our argument that it was not right to apply a restriction based on the “Dreyfus gloss”: With great respect to the Court of Appeal, it should not have concerned itself with a hypothetical restriction concerned with the existence of mutual assistance agreements, even if it considered that such a restriction might have been justifiable under EU law and might have been imposed by Parliament. The fact was that there was no such restriction in existence. Neither section 23 of the Inheritance Tax Act nor section 989 of the Income Tax Act made relief for trusts in third countries conditional on there being a mutual assistance agreement in place. 

The fact that such a restriction, if it had existed, might have been in conformity with EU law did not mean that it could be imposed by the court, by means of a purported interpretation of the language used in section 23. So, after a long fight, Mrs Coulter’s estate is free of IHT and can all be used for the elderly in her Jersey parish, exactly as she wished.

The authors
Anthony Nixon and Clementine Burch have been part of the team at Irwin Mitchell advising the late Mrs Coulter’s executors and the trustees of the charitable trust formed to put Mrs Coulter’s wishes into effect (Registered Charity 1140396).

We are particularly grateful to our colleagues Sabrina Goran and Tom Barnard, and to our recently retired colleague Martin Cross, as well as to the four members of the bar who have advised and represented us at the various court hearings, Alan Steinfeld QC, Richard Vallat QC, Marika Lemos and Rory Mullan.