Freedom of movement of capital applies to charitable gifts to Jersey (at least for now!)
What has happened?
The Supreme Court ("the Court") released on 16 October their judgment in the case of 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 ("IHT") relief in the same way as they would be if they made such a gift to a UK-based charity.
What is the case about?
The case relates to a gift of the residuary estate of Mrs Beryl Coulter, following her death in 2007, to the trustees of the Coulter Trust, a trust governed by the laws of Jersey.
The Court had two issues to determine, as follows:
- Whether Jersey forms part of the UK for the purposes of Article 56 of the Treaty Establishing the European Community ("Article 56"), which prohibits restrictions on free movement of capital (now Article 63 of the Treaty on the Functioning of the European Union)
- Whether the refusal of IHT relief under section 23 of the Inheritance Tax Act 1984 ("IHTA") in respect of Mrs Coulter's gift to the Coulter Trust is justifiable under EU law.
On the first point, the Court concurred with the Court of Appeal (CA) that Jersey is to be considered a third country for the purpose of a transfer of capital from the UK. 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 s23 IHTA 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 UK and Jersey at the time of Mrs Coulter's death.
Accordingly, the Court allowed the executors' appeal on the basis that the refusal of IHT relief on that gift under s23 IHTA was in breach of Article 56.
Why is it interesting?
The decision has a number of interesting implications (the future applicability of which may vary depending on the terms of the UK's proposed departure from the EU). Clearly, it is helpful for individuals and others in the UK who have made gifts to charities in Jersey, elsewhere in the Channel Islands and to other third countries, as it is now clear that IHT relief applies. It will be of equal interest to trustees and other charities in Jersey who are in receipt of such gifts. The decision may give rise to applications to 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 Court considered decisions of the Court of Justice of the EU 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 UK and EU. Depending upon the outcome of the current Brexit negotiations, this could be of largely historical interest. However, if an agreement is reached between the UK and EU before withdrawal, it is likely that the relationship with the EU of 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 advisors, 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 IHT relief under s23 IHTA, 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.
What happens next?
This decision raises many interesting issues. As such, we will write further on specific points of interest over the coming weeks. In the meantime, if you have any queries with regard to anything raised in this note or the case more generally, please get in touch with your usual contact at Forsters.