Routier and another v Commissioners for Her Majesty’s Revenue and Customs

United Kingdom

16.10.2019

Civil

A treaty is binding upon each party in respect of its entire territory unless a different intention is expressed

The Appellants in present case are the executors of Mrs Beryl Coulter, who died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes which are agreed to be exclusively charitable under English law. The Appellants were appointed under Mrs Coulter’s will as the trustees. They were domiciled in Jersey, and the proper law of the trust (“the Coulter Trust”) was specified in the will as the law of Jersey.

At the time of Mrs Coulter’s death, there was in force a treaty between the United Kingdom and Jersey which included provision for the exchange of information relating to income tax. In 2009 a further treaty (the United Kingdom/Jersey Tax Information Exchange Agreement) came into force, which included provision for the exchange of information relating to inheritance tax. On 1 October, 2010 the Appellants retired as trustees (but not as executors) and were replaced by a UK resident trustee. On 12 October, 2010, the will was amended so as to make the proper law of the trust the law of England and Wales. On 14 February, 2014 the Coulter Trust was registered as a charity under the law of England and Wales.

Article 29 of the Vienna Convention on the Law of Treaties 1969 provides that, a treaty is binding upon each party in respect of its entire territory unless a different intention is expressed. Section 23 of the Inheritance Tax Act, 1984 (“the Inheritance Tax Act”) provides for an exemption from inheritance tax in respect of gifts to charities. On 29 May 2013, the Respondents, Her Majesty’s Revenue and Customs (“HMRC”), determined that Mrs Coulter’s gift of her residuary estate to the Coulter Trust did not qualify for relief under Section 23, as it had not been given to a charity within the meaning of that provision. That conclusion was based on the fact that the Coulter Trust was governed by the law of Jersey as at the date of Mrs Coulter’s death, and on a construction of section 23 which limited relief to trusts governed by the law of a part of the United Kingdom. On the basis that Jersey was not a part of the United Kingdom for the purposes of section 23, it followed that relief was not available. The amount of inheritance tax due, if relief is not available, is about £567,000. Jersey is to be considered a third country for the purpose of a transfer of capital from the United Kingdom. Accordingly, EU rules on the free movement of capital do apply to transfers of capital between the United Kingdom and Jersey, and it is accepted that the refusal of relief under Section 23 is a restriction on that free movement.

The Appellants have appealed against that determination on the basis that, it is incompatible with Article 56 of the Treaty Establishing the European Community (“EC”), now Article 63 of the Treaty on the Functioning of the European Union (“TFEU”). Provision prohibits restrictions on the free movement of capital between EU member states, and between member states and third countries. HMRC’s primary response is that, Article 56 has no application to the facts of this case, on the basis that, although Jersey is not a part of the United Kingdom for the purposes of Section 23, a movement of capital between the United Kingdom and Jersey should be regarded as an internal transaction taking place within a single member state. HMRC further argue that, the restriction resulting from the adverse treatment of the Coulter Trust is in any event justifiable under EU law, in view of the fact that there was no mutual assistance agreement covering inheritance tax in force between the United Kingdom and Jersey at the date of Mrs Coulter’s death.

Section 23 of the Inheritance Tax Act can be brought into conformity with Article 56 by disapplying the Camille and Henry Dreyfus Foundation Inc v. Inland Revenue Comrs (Dreyfus gloss) on the meaning of the words contained in section 989 of the Income Tax Act, and that, having done so, the gift to the Coulter Trust qualifies for relief under Section 23, it is unnecessary for this court to decide the other issues in dispute between the parties: in particular, whether the Court of Appeal was correct to hold that the Dreyfus gloss applied to both limbs of Section 23(6), and whether it was correct to hold that a general requirement that there be a mutual assistance agreement in place at the time of the testator’s death would constitute a justifiable restriction on freedom of movement of capital under EU law. The Court of Appeal’s decision cannot stand, even if it was correct in its determination of those issues. Article 56 EC applied to Mrs Coulter’s gift of assets in the United Kingdom to trustees in Jersey, that the refusal of relief from inheritance tax on that gift under section 23 of the Inheritance Tax Act was in breach of article 56, and that the appeal should therefore be allowed.

Tags : Inheritance tax Relief Entitlement

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