HomepageCommercial LawPrivate LawPublic Law & Human RightsCriminal LawEU & International LawCareers

Accessibility

Have Irlen Syndrome, or need different contrast? Click the button below for options.

Background Colours

Subscribe

Enter you email address below to subscribe to free customisable article notifications.

Alternatively, click the button below for our various RSS Feeds (available journal wide, or per section).

Routier v HMRC: Redefining 'Charitable Purposes' For Inheritance Tax

Article Cover Image

About The Author

Liza Hartley (Deputy Editor)

Liza is an English graduate from Cambridge University, currently studying the GDL at City University of London. Her main areas of interest are Public, Planning and Housing law. Outside the law, she enjoys reading, playing hockey and travelling to new cities.

[Read More]

Conventions of statutory interpretation can often live rooted in case law and subsequent statutes for decades before their implications are discovered to cause a conflict of laws. A ‘convention’ in statutory interpretation is the prevailing understanding of obscure or vague legislative wording, which does not have the full force of law. These conventions are normally established through judgments which are then followed as precedent in subsequent cases. On the rare occasions when conventions conflict with an express law, judges must trace backwards through the chain of precedents to uncover the source of the contradiction and resolve it, often with wide-reaching consequences.

On the 16th October 2019 the Supreme Court handed down a judgment which did just that. The case of Routier and another (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) [2019] UKSC 43 questioned the legal status of Jersey in relation to the UK and the EU, the free movement of capital under Article 56, and an interpretative convention established in 1956 which remained embedded in the Inheritance Tax Act 1984 (IHTA 1984) until this judgment was given.

The Facts

Mrs Beryl Coulter was a resident of the bailiwick of Jersey and passed away in October 2007 leaving a considerable estate on trust for charitable purposes. Her estate included assets in the United Kingdom and hence was liable to taxation, subject to the relief for charitable donations granted in s23 IHTA 1984. The proper law of trust was the law of Jersey as specified in Mrs Coulter’s will at the time of its creation. In October 2010 the appellants retired as trustees and were replaced by a new trustee, a UK resident, and the will was amended to make the law of England and Wales the proper law governing the trust.

HMRC, the respondents, determined in 2013 that Mrs Coulter’s trust was not eligible for inheritance tax relief under s.23. This was because the trust was not governed by UK law at the time of its creation and so did not comply with the implied construction of s.23, which limited the definition of ‘charitable trusts’ to those governed by the law of a part of the UK. Without relief, the tax payable to HMRC would have been around £567,000.

The executors appealed the determination of HMRC not to grant the relief in the Court of Appeal in 2016, but were unsuccessful. They subsequently appealed to the Supreme Court.

The Submissions

The appellants, Mrs Coulter’s executors, submitted that HMRC's decision violated Article 56 of the Treaty Establishing the European Community (Article 63 TFEU) which prohibits restriction on the free movement of capital between EU member states and also between member states and ‘third countries’. It being common ground that Jersey is not a member state, the issue turned in part on whether Jersey could be considered a ‘third country’. It was accepted that Jersey should be regarded as a third country when this case was heard by the Court of Appeal; HMRC submitted that this was incorrect and that any transaction between Jersey and the United Kingdom should be considered an internal transaction with no bearing on the EU’s free movement of capital laws.

There is no firm precedent for Jersey’s legal status. It was treated as a third country by the EU for the purposes of personal data protection laws in 2008 - however, Jersey is a crown dependency for whose external relations the UK is responsible, and under international law the UK government has the power to extend the operation of treaties which it has concluded to the Channel Islands. HMRC submitted further that Jersey, since it was not a state with its own legal personality, cannot be called a third country. HMRC drew particular attention to the close links that tie Jersey and the UK both economically and legally. However, the Supreme Court stated that these close ties had little relevance to the regime set out by the ‘systematic and consistent approach’ of the CJEU to resolving cases such as this. Paragraph 35 of Lord Reed and Lord Lloyd-George’s judgment in Routier stated:

The question whether a territory is to be regarded as a third country is context specific and will depend on whether, under the relevant Treaty of Accession and supplementary measures, the relevant provisions of EU law apply to that territory. The proximity of the ties between a member state and the territory in question is not a factor justifying departure from that scheme.

The Supreme Court declined to make a preliminary reference to the CJEU because they deemed the answer to be clear in this case: a movement of capital from a member state in which Article 56 applies to a territory in which it does not positions Jersey as a ‘third country’ in relation to the UK, according to the precedent set by the CJEU. For the purposes of a transaction from the UK to Jersey, Jersey is to be considered a ‘third country’ because the EU laws on free movement of capital do not apply there, and as such the transaction cannot be said to be an internal transaction within the UK.

If Jersey is a ‘third country’ in EU law, the refusal of relief for the Coulter Trust under s.23 IHTA 1984 constitutes a restriction on the free movement of capital between a member state and a third country, contrary to Article 56. However, the Court of Appeal determined that this restriction was justifiable under EU law after examining the construction of s.23. They concluded that the stipulation in s.23(1) and s.23(6) that relief was reserved for ‘trust[s] established for charitable purposes only’ referred only to those trusts which were governed by UK law and subject to the jurisdiction of UK courts. They did so because of a chain of referential definitions leading back to a 1956 judicial gloss which determined the definition of ‘charity’ and ‘charitable’ to be so limited.

The Dreyfus Gloss

HMRC had originally refused to grant tax relief for the inheritance because at the time of her death Ms Coulter’s trust was governed by Jersey law, and by convention, s.23 relief only applies to trusts governed by the United Kingdom. This convention relies upon the interpretation of the phrase ‘trust established for charitable purposes only’ in section 37 of the Income Tax Act 1918 as being implicitly limited to trusts governed by UK law. This interpretation was established in the judgment given by the House of Lords in Camille & Henry Dreyfus Foundation Inc v Inland Revenue Comrs [1956] AC 39. This gloss, referred to throughout the Supreme Court’s judgment as the Dreyfus gloss, was accepted by the Court of Appeal.

The Court of Appeal reached this determination on account of the same phrasing (‘trust established for charitable purposes only’) being found in s.989 of the Income Tax Act 2007 and the requirement of s.272 Inheritance Tax Act 1984 that ‘charity’ and ‘charitable’ be given the same definition as in the Income Tax Act. As a result the gloss in Dreyfus had been incorporated into the Inheritance Tax Act 1984 via s.272, in which it is specified that the definition is to be identical to that found in s.989 of the Income Tax Act, which was the construction to which the Dreyfus gloss applied.

However, it is worth noting that the definitions of ‘charity’ and ‘charitable’ had since been expressly removed from s.272 IHTA 1984 by Schedule 6 of the Finance Act 2010, and replaced with a new definition which is itself called into question by the Routier decision, as it does not extend the meaning of ‘charity’ to bodies established in a third country. In effect, the Finance Act 2010 incorporated the Dreyfus gloss into law. With the gloss now disapplied, the definition in the Act may be called into question too.

The Judgment

The Supreme Court’s decision stated that the Dreyfus gloss, while legitimate in its own time, had been incompatible with Article 56 of the Treaty Establishing the European Community since the UK’s ratification of that treaty in 1972. Since this was called ‘the only relevant restriction which existed at any material time’, the judgment followed that this must be disapplied from s.23 IHTA 1984 according to the principle of supremacy of EU law – where EU law (Article 56) and domestic law (the Dreyfus gloss) come into conflict, EU law prevails. As the judgment itself stated:

‘Article 56 EC is directly applicable as law in the United Kingdom and must be given effect in priority to inconsistent national law, whether judicial or legislative in origin.’

This is a remarkable ruling so late in 2019. EU supremacy must be observed for as long as it is still applicable and the Brexit process, three years down the line, can have no bearing upon that supremacy and the rigour with which the courts uphold it until that process is complete. It is also something of a cautionary tale: too unquestioning a reliance on precedent allowed UK tax law to violate an EU principle as fundamental as the free movement of capital, and to violate it from the EU’s inception to the very last moments of our membership. It also instructs courts on the limitations of their license when purporting to apply a conforming construction to the language actually used by Parliament.

As well as now permitting non-UK trusts to benefit from ‘charitable’ status, this case troubles whether the definition of charities given elsewhere, including in the Finance Act 2010, are fit for purpose.

This decision was much anticipated by the legal and financial services worlds alike. Extending the scope of the inheritance tax exemption will likely see more cross-border giving. Beyond the implications for charity, the unequivocal assertion that Jersey is a ‘third country’ renders any restriction on the free movement of capital between Jersey and the UK a breach of EU law. This is not limited to matters of inheritance or charitable gifts but could potentially apply to any movement of capital.

However, this change is likely to be very short lived. Along with much of the foreseeable upheaval of UK law involved in Brexit, the consideration of free movement of capital with the EU will become redundant. For the time being, however (and at least until the end of the transition period, currently slated for December 2020), it remains the law of the land, and Routier was decided accordingly.

For the latest articles straight to your inbox, you can subscribe for free. Alternatively, follow @KeepCalmTalkLaw on Twitter or Like us on Facebook.

Tagged: European Union, International Law, Supreme Court, Tax Law, Trusts

Comment / Show Comments (0)

You May Also Be Interested In...

Scotch Whiskey v Lord Advocate: A Neat Solution or The Law on the Rocks?

23rd Nov 2018 by Ming Lu Ang

Non-Taxation of McDonald's: Illegal State Aid or Valid Loophole?

6th Nov 2018 by İnayet Aydeniz Baytaş

A Global Perspective on Anti-Suit Injunctions

4th Jul 2017 by Alexios Ektor Koursopoulos

Accidental Americans: The US Citizenship Conundrum

5th Jan 2016 by Keir Baker

Online Gambling: A Jurisdictional Nightmare

21st Aug 2014 by Chris Bridges

The Validity of E-signatures

12th Aug 2014 by Maxi Kussatz

Section Pick February

Routier v HMRC: Redefining 'Charitable Purposes' For Inheritance Tax

Editors' Pick Image

View More

KCTL News

Keep Calm Talk Law: Moving Forward

3rd Sep 2019

Changing of the Guard: Moving Keep Calm Talk Law Forward

12th Aug 2018

An Anniversary or Two: Four Years of Keep Calm Talk Law

11th Nov 2017

Rising from the Ashes: The Return of Keep Calm Talk Law

18th Nov 2016

Two Years On, Keep Calm Talk Law’s Legacy is Expanding

11th Nov 2015

Twitter

Javascript must be enabled for the Twitter plugin to function. Click below to visit us on Twitter.

Free Email Subscription

Subscribe to Keep Calm Talk Law for email updates, and/or weekly roundups. You can tailor your subscription on activation. Both fields are required.

Your occupation / Career stage is used to tailor your subscription and for readership monitoring.

Uncheck this box if you do not want to receive our monthly newsletter.

By clicking the Subscribe button, you agree to our privacy policy and terms of service. Please ensure you read these in full.

Free Subscription