Routier & Anor v Revenue and Customs [2019] UKSC 43

Mrs Coulter, domiciled in Jersey, left her UK estate to a Jersey-law charitable trust. HMRC refused inheritance tax relief under section 23 of the Inheritance Tax Act 1984. The Supreme Court allowed the appeal, holding that refusal breached EU free movement of capital.

Facts

Mrs Beryl Coulter died domiciled in Jersey in October 2007, leaving her residuary estate (including UK assets of approximately £1.7m) on trust for purposes which were agreed to be exclusively charitable under English law. The trustees (the appellants) were Jersey-domiciled, and the proper law of the Coulter Trust was specified as the law of Jersey. In 2010, the appellants retired as trustees in favour of a UK-resident trustee, the proper law of the trust was amended to English law, and in 2014 the Trust was registered as an English charity.

HMRC determined on 29 May 2013 that the gift did not qualify for relief under section 23 of the Inheritance Tax Act 1984 because, at the date of death, the trust was governed by Jersey law and (applying the construction adopted in Camille & Henry Dreyfus Foundation Inc v IRC [1956] AC 39) relief was limited to trusts governed by UK law and subject to UK court jurisdiction. The tax at stake was approximately £567,000.

Issues

Two principal issues arose:

1. Whether Jersey forms part of the United Kingdom for the purposes of article 56 EC (now article 63 TFEU), or is to be regarded as a third country so that the free movement of capital provisions were engaged.
2. If article 56 applied, whether the refusal of relief under section 23 was justifiable under EU law, particularly given the absence, at Mrs Coulter’s death, of a mutual assistance agreement on inheritance tax between the UK and Jersey.

Arguments

Appellants

Mr Steinfeld QC submitted that Jersey was to be treated as a third country for the purposes of article 56, so that the movement of capital was between a member state and a third country, engaging article 56. The Dreyfus-based restriction confining relief to UK-law trusts was therefore incompatible with EU law.

Respondent (HMRC)

Ms Bacon QC argued that Jersey is not a state with legal personality but a European territory for whose external relations the UK is responsible. A movement of capital between the UK and Jersey should be treated as an internal transaction within a single member state. In the alternative, the refusal was justified because there was no mutual assistance agreement on inheritance tax in force at the date of death.

Intervener (Attorney General for Jersey)

Mr McDonnell submitted that Jersey is part of the EU only for those provisions of EU law expressly applied to it; for other purposes it must be treated as a third country, being outside the territorial scope of the relevant EU rules.

Judgment

Status of Jersey under article 56 EC

Lord Reed and Lord Lloyd-Jones (with whom Lady Hale, Lord Carnwath and Lord Hodge agreed) undertook a detailed review of CJEU authority, including Van Der Kooy, Commission v United Kingdom (Case C-30/01), Jersey Produce, Pereira Roque, Prunus, X BV and Gibraltar Betting. The Court held that the CJEU’s approach is context-specific: a territory is to be regarded as part of the relevant member state for the purposes of EU provisions which apply to it, and as a third country for the purposes of EU provisions which do not.

Since EU rules on the free movement of capital do not apply in Jersey (Protocol 3 to the 1972 Act of Accession extending only customs and quantitative restriction rules), a movement of capital from the UK to Jersey is not a purely internal situation. The Court considered Prunus determinative: in that case the BVI were treated as non-member states for the purposes of free movement of capital, and that reasoning could not be distinguished on the basis that the BVI were not associated with France. The proximity of ties between the UK and Jersey was not a factor justifying a different conclusion.

Accordingly, for the purposes of article 56 EC, Jersey is to be treated as a third country, and no preliminary reference to the CJEU was required.

Justification and construction of section 23

On its face, section 23 of the Inheritance Tax Act 1984 imposes no restriction on free movement of capital and does not discriminate between UK-law and foreign-law charitable trusts. The only restriction was the judicial gloss placed in Dreyfus on the statutory language (now found in section 989 of the Income Tax Act 2007, incorporated by section 272 of the 1984 Act), which limited relief to trusts governed by UK law and subject to UK court jurisdiction. That restriction could not be justified under EU law.

Article 56 EC being directly applicable, the Dreyfus gloss could not be applied in situations falling within article 56. Once the gloss was disapplied, section 23 as drafted complied with EU law, and the Coulter Trust plainly satisfied its conditions.

The Supreme Court held that the Court of Appeal had erred by reading into section 23 a hypothetical requirement for a mutual assistance agreement. That restriction was not actually present in the legislation; the fact that Parliament could lawfully have imposed such a restriction did not entitle the court to impose one judicially. Notably, the Court of Appeal had itself found (at para 84) that HMRC did not in fact require any information: HMRC accepted that the Coulter Trust’s objects were charitable under UK law and did not suggest its terms would not be enforced in Jersey.

It was therefore unnecessary to decide whether the Dreyfus gloss applied to both limbs of section 23(6), or whether a general mutual assistance requirement would be a justifiable restriction under EU law.

Implications

The decision clarifies that, for the purposes of the EU free movement of capital provisions, Jersey is to be treated as a third country in relation to the United Kingdom, because those provisions do not extend to Jersey under Protocol 3 to the 1972 Act of Accession. The status of a Crown Dependency or associated territory under EU law depends on whether the particular EU rule applies to that territory, not on the closeness of its constitutional, economic or monetary ties with the member state.

For inheritance tax practice, the judgment establishes that, at all material times, section 23 of the Inheritance Tax Act 1984 was to be applied without the Dreyfus gloss in cases falling within article 56 EC. Gifts to trusts governed by the law of a third country could qualify for relief provided the statutory conditions on the face of section 23 were met. The Court expressly declined to entertain the suggestion that courts could judicially import a mutual assistance requirement that Parliament had not enacted, emphasising the limits of judicial interpretation even where a more restrictive provision might itself have been EU-compliant.

The case is significant for executors, trustees and advisers dealing with cross-border charitable gifts, and illustrates how directly applicable EU law operated to disapply a long-standing judicial gloss on domestic tax legislation. It also provides authoritative Supreme Court guidance on the territorial reach of EU free movement rules in respect of the Crown Dependencies.

Verdict: The appeal was allowed. Article 56 EC applied to Mrs Coulter’s gift of UK assets to trustees in Jersey, and the refusal of relief from inheritance tax under section 23 of the Inheritance Tax Act 1984 was in breach of article 56.

Source: Routier & Anor v Revenue and Customs [2019] UKSC 43