England & Wales Court of Appeal rule that UK assets of a Jersey domiciled individual will be liable to UK inheritance tax even though they were left to a charitable trust subject to Jersey law.
By way of background, in the case in question, Routier V HMRC  EWCA Civ 1584, Beryl Coulter died in 2007 domiciled in Jersey. Her estate included £1.8 million of assets located in the UK. These assets were part of her residuary estate, which she left in trust to build homes for elderly residents of the parish of St Ouen in Jersey or, in default, to fund a charity, Jersey Hospice Care.
On her death, her executors, claimed charitable relief from UK IHT as set out in s23 of the Inheritance Tax Act 1984 (IHTA 1984). Section 23 broadly states that property is given to charities if it becomes the property of charities or is held on trust for charitable purposes only. The definition of charity in Finance Act 2010 schedule 6 part 1 includes the condition that charities must be subject to the jurisdictions of a UK court or that of another EU member state.
However, HMRC refused the relief on the basis that this did not apply to gifts made outside the UK even though it accepted that the Coulter Trust has only charitable purposes as a matter of English law.
Mrs Coulter’s executors challenged HMRC’s decision in 2014, but having lost in the England & Wales High Court they then took the case to the Court of Appeal in 2016.
The denial of relief in this case derived from a 1956 House of Lords ruling in the case of Camille and Henry Dreyfus Foundation Inc v IRC  AC 39. This judgment 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 the Coulter Trust is not a charity within the meaning of the relevant law and thus the bequest is not entitled to charitable relief from UK IHT.
The Court of Appeal found that the 60-year old Dreyfus judgment was correct and that the High Court judge in the earlier Coulter hearing, Mrs Justice Rose, had been right to note a discrepancy in requiring a court to ascertain whether the purposes of a body governed by foreign law were charitable purposes as a matter of UK law.
However, the executors also argued that HMRC’s interpretation of section 23 would constitute an unlawful restriction on the free movement of capital between the EU member states and third countries under Article 63 of the EU treaties under which Jersey is a third country but HMRC also rejected this argument.
As neither the executors nor HMRC presented enough detail regarding the Article 63 argument to enable the Court of Appeal to decide, the appeal was dismissed and the court ordered the parties to return after they have prepared full arguments on this ground.
The case was re-heard in June 2017 and it was found that Jersey is not part of the UK for the purposes of EU freedoms and HMRC is entitled to refuse to grant relief on gifts to non-UK charities unless there is a mutual agreement between the UK and the country in which the charity is based. There was no such agreement with Jersey at the time of Mrs Coulter’s death so the appeal was dismissed. The charitable trust did not therefore meet the requirements of section 23 IHTA 1984 or Finance Act 2010 so relief from IHT was not available in this particular case.
The outcome of this case is interesting as it provides some guidance to those who are planning to leave assets to non-UK charities.
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