Routier & Anor v The Commissioners for HMRC

Inheritance tax relief for charitable gifts may be restricted to secure effective fiscal supervision, but the restriction must be proportionate. A taxing authority may require means to verify information about an overseas charity. Neither taxpayer-supplied information nor the absence of a mutual assistance agreement creates an automatic rule; proportionality depends on the circumstances.

For Article 56 EC, Jersey is a third country rather than part of the United Kingdom for capital movements. Reciprocity is not required. Section 23 of the Inheritance Tax Act 1984 could be interpreted to extend relief to qualifying charities in EU member states and third countries. For third countries, an information-exchange or mutual assistance agreement may be required.

The executors of Beryl Coulter’s estate challenged HMRC’s determination that inheritance tax was payable on a residuary gift to a Jersey charitable trust without relief under section 23 of the Inheritance Tax Act 1984. The High Court upheld HMRC’s determination in [2014] EWHC 3010 (Ch). On an earlier hearing, the Court of Appeal upheld the interpretation of section 23 as requiring a trust to be established under UK law and subject to UK court jurisdiction in [2016] EWCA Civ 938.

The adjourned appeal concerned whether that restriction infringed freedom of movement of capital, whether it was justified by effective fiscal supervision, and whether section 23 could be interpreted compatibly with EU law.

Lady Justice Arden gave the leading judgment. Lord Justice Green agreed and added observations on evidential requirements. Lord Briggs agreed with both judgments. The appeal was dismissed.

1. Jersey’s status. Jersey is not constitutionally part of the United Kingdom. Under the special arrangements applicable to the Channel Islands, it is treated as part of the United Kingdom only for Treaty provisions expressly applying there. Since freedom of movement of capital is not among those provisions, Jersey is a third country for Article 56 EC, now Article 63 TFEU. The Court declined to refer the issue to the CJEU.
2. Reciprocity. The United Kingdom could not deny the benefit of freedom of movement of capital because Jersey was not itself bound by that principle. The principle was deliberately extended unilaterally to movements between member states and third countries.
3. Effective fiscal supervision. A restriction on capital movement may be justified only if it is appropriate to achieve effective fiscal supervision and goes no further than necessary. There is no blanket rule that a mutual assistance agreement is always unnecessary where a taxpayer can provide information, or that it is always sufficient to justify refusal. The assessment is one of proportionality.
4. Verification. A taxing authority is entitled to have means of checking whether an overseas charity is genuine and operates lawfully. In an appropriate case, taxpayer evidence alone may be insufficient. The absence of a mutual assistance agreement may justify refusal where the necessary verification cannot otherwise be obtained. On the facts, the restriction was capable of proportionate justification.
5. Timing. The conditions in section 23 had to be satisfied at the date of death. Later registration of the Coulter Trust as a UK charity and later transfers of assets could not retrospectively cure the original failure.
6. Conforming interpretation. Section 23 could be read as subject to freedom of movement of capital. Relief could therefore extend to charities satisfying UK-law charitable requirements and subject to the law and jurisdiction of an EU member state, or of a third country having a mutual assistance agreement with the United Kingdom. That interpretation did not go against the grain of the legislation. No preliminary reference was necessary.

1. Court of Appeal (present appeal) – The outstanding EU-law issues were determined and the appeal was dismissed.
2. Court of Appeal – On the earlier hearing, the Court upheld HMRC’s determination and interpreted section 23 as imposing UK-law and UK-jurisdiction requirements: [2016] EWCA Civ 938.
3. High Court, Chancery Division – Rose J upheld HMRC’s determination: [2014] EWHC 3010 (Ch).