Routier: extending the scope of the inheritance tax exemption on gifts to charities, at least for now!

The Supreme Court has issued its judgment in the case of Routier and another v HMRC [2019] UKSC43.

The decision has possible consequences for UK taxpayers and charities based outside the UK who wish to take advantage of the UK inheritance tax exemption on gifts to charity, as well as potentially wider consequences for other transactions involving the movement of capital between the UK and third countries.

The facts

Under her will, Mrs Beryl Coulter (who died in Jersey in 2007) left the residue of her estate on trust for charitable purposes (the Coulter Trust). Although the purposes of the Coulter Trust were exclusively charitable under English law, the trustees were domiciled in Jersey and the trust was to be governed by Jersey law.

The residue of Mrs Coulter’s estate included substantial UK assets. UK inheritance tax arises on the transfer of such assets on death unless an exemption or relief applies. An exemption from inheritance tax is available on gifts to charity; however, in 2013, HMRC determined that the gift to the Coulter Trust under Mrs Coulter’s will did not qualify for this exemption.

Section 23 of the Inheritance Tax Act 1984 provided (at that time) for an exemption from inheritance tax where there is a transfer of value to a body of persons or trust established for charitable purposes only. On the face of it, the transfer under Mrs Coulter’s will to the Coulter Trust appeared to qualify for the exemption since its purposes were exclusively charitable under English law. However, HMRC argued, on the basis of the House of Lords’ judgment in Camille and Henry Dreyfus Foundation Inc v Inland Revenue Commissioners [1955] 3 All ER 97, that the phrase “trust established for charitable purposes only” must be interpreted as being limited to trusts which are governed by the law of some part of the United Kingdom and subject to the jurisdiction of the UK courts.  

The executors of Mrs Coulter’s estate argued that HMRC’s view was incompatible with article 56 of the Treaty Establishing the European Community (now article 63 of the Treaty on the Functioning of the European Union) which prohibits restrictions on the free movement of capital between EU member states, and between member states and third countries. However, HMRC argued that article 56 did not apply as the transfer to the Coulter Trust should be regarded as an internal transaction taking place within a single member state. HMRC also argued that, in any event, the restriction resulting from the adverse treatment of the Coulter Trust was justifiable under EU law.

The Supreme Court therefore had two issues to consider:

  • whether a movement of capital between the United Kingdom and Jersey should be viewed as an internal transaction taking place within a single member state for the purposes of article 56; and
  • if not, whether the decision to refuse inheritance tax relief on the gift to the Coulter Trust is justifiable under EU law.

The decision

The status of Jersey

It was accepted between the parties that, since Jersey is not a member state, the gift to the Coulter Trust was not a movement of capital between member states.

Therefore, the question was whether Jersey should be viewed as a “third country” for the purposes of article 56 or whether, as HMRC argued, a movement of capital between the UK and Jersey should be regarded as an internal transaction within a single member state (namely the United Kingdom).

The Supreme Court held that, since the EU rules on free movement of capital are not expressed to apply in Jersey and property had moved from a jurisdiction where the rules apply to one where it does not, the transfer could not be described as an internal transfer. Jersey is therefore a "third country" for the purposes of article 56 and so the principle of the free movement of capital does apply to the transfer of funds to the Coulter Trust.

Restriction justifiable under EU law?

The interpretation of section 23 of the Inheritance Tax Act 1984 with the “gloss” of the Dreyfus case (i.e. restricting inheritance tax relief to charitable trusts which are governed by the law of some part of the United Kingdom and subject to the jurisdiction of the UK courts) is incompatible with article 56. The Supreme Court therefore needed to consider whether this restriction was justifiable under EU law.

HMRC argued that the restriction was justifiable on the basis that HMRC would need to confirm that the charity was in fact carrying out charitable objects and, in the absence of a mutual assistance agreement between the UK and Jersey at the time, it would be unable to do so.

The Court of Appeal had agreed and had considered that a requirement to have an information exchange agreement between the UK and the third country could be read into section 23. On that basis, the Court of Appeal held that the refusal to grant relief under section 23 was justifiable under EU law.

However, the Supreme Court disagreed with the Court of Appeal. It held that there was no requirement for a mutual assistance agreement in the legislation and the Court of Appeal should not have concerned itself with a hypothetical one. The fact that such a requirement in section 23 may have made the refusal to grant relief justifiable under EU law did not mean that the court should read that requirement into section 23.

Accordingly, the restriction of the relief from inheritance tax to charitable trusts which are governed by the law of a part of the United Kingdom and subject to the jurisdiction of the UK courts, as well as being established for purposes which are exclusively charitable under English law, cannot be justified under EU law.

Given that article 56 is directly applicable as law in the United Kingdom, and must be given effect in priority to inconsistent national law, the Supreme Court concluded that the gift to the Coulter Trust would therefore qualify for the relief from inheritance tax.

Implications of the judgment

In April 2012, the exemption from UK inheritance tax was extended so that it also applies to gifts made to charities established in the EU, Norway, Iceland and Liechtenstein (but not other jurisdictions such as Jersey), provided that such charities have exclusively charitable purposes under English law. In practice, however, very few non-UK charities have taken advantage of this as the relevant legislation also imposes various conditions which must be satisfied by the non-UK charity in question and because of differences in what constitutes a charitable purpose across Europe.

The implications of the Supreme Court’s decision in Routier for non-UK charities is therefore potentially significant and could open up opportunities for the use of non-UK trusts for English charitable purposes by UK taxpayers seeking to rely on the exemption from UK inheritance tax and, perhaps, for cross-border giving more generally. Charities in jurisdictions where charitable purposes are largely consistent with the English law meaning, including Jersey, are likely to be best placed to take advantage of new opportunities. However, it should be noted that there are other more established ways to make sure that gifts to charities do qualify for relief and so, until the full implications of the decision become clear, we would not advise relying on this case as a planning tool, and instead it could be considered as a defence where necessary.

Where inheritance tax has already been paid on gifts to non-UK charities, it may be difficult to get a tax repayment as the position before this case was the “established practice” and a claim for overpaid inheritance tax may not be permitted. However, it may prove helpful as an authority that inheritance tax does not need to be paid where the triggering event for the tax has not yet occurred.

Going beyond the possible implications for charitable giving, the confirmation that Jersey is a third country for the purposes of the freedom of movement of capital is important, as it means that any restrictions on the movement of capital between the UK and Jersey (e.g. through imposing high tax charges) are in breach of EU law and only permitted where such restrictions are justifiable. This could be applied to any transaction between the UK and Jersey (not limited to legacies and gifts to charities) so has potentially wide-reaching consequences.

For example, the decision could be helpful in the context of the “EU motive defence” under the Transfer of Assets Abroad regime (under which, broadly speaking, income anywhere within a non-UK structure is deemed to belong either to the individual who was ultimately responsible for the creation or funding of the structure, or to any other individual who receives any benefit from the structure) where the effect of that regime can be found to be an unjustifiable restriction on the free movement of capital between the UK and Jersey (or any other circumstance where the free movement of capital applies).

It should, however, be noted in all of this that, since the judgment hangs on the applicability of EU law, its long-term relevance will necessarily be linked to the nature of Brexit and whether such law remains in force in the long-term.