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

The Supreme Court held that article 56 EC (now article 63 TFEU) on the free movement of capital applied to a gift of United Kingdom assets to a Jersey trust and that the judicial gloss derived from Camille & Henry Dreyfus Foundation Inc v Inland Revenue Commissioners (which confined relief to trusts governed by the law of some part of the United Kingdom and subject to United Kingdom jurisdiction) could not be applied so as to deny relief under section 23 of the Inheritance Tax Act 1984 in circumstances within the scope of article 56. The court analysed the territorial application of EU law (in particular article 299 EC/ article 355 TFEU and Protocol 3 to the Treaty of Accession), surveyed the relevant Court of Justice jurisprudence (including Jersey Produce, Prunus and related authorities) and concluded that because EU rules on free movement of capital do not apply in Jersey, transfers of capital from the United Kingdom to Jersey are movements of capital to a third country and thus fall within article 56.

Applying article 56 as directly applicable domestic law, the court disapplied the Dreyfus gloss so that section 23 must be applied without the restriction that the beneficiary trust be governed by the law of a part of the United Kingdom; on that basis the Coulter Trust qualified for the charitable exemption in section 23 and the appeal was allowed.

Background and facts. The appellants were the executors and initial trustees of Mrs Beryl Coulter who died domiciled in Jersey on 9 October 2007. Her residuary estate, including United Kingdom assets of about £1.7m, was left on trust for purposes agreed to be exclusively charitable under English law. The will specified the proper law of the trust as Jersey law. The Coulter Trust was later administered under English law after trusteeship and governing law changes, but the relevant question concerned the position at the date of death.

Nature of the claim and relief sought. The appellants challenged HMRC’s decision dated 29 May 2013 that the gift did not qualify for relief under section 23 of the Inheritance Tax Act 1984, on the basis that the trust was governed by Jersey law at the date of death and, following the judicial gloss in Dreyfus, did not qualify as a charity for the purposes of UK tax relief. They relied on EU law, in particular article 56 EC (free movement of capital), to contend that the restriction was incompatible with EU law and that relief should be available.

Procedural posture and path to the Supreme Court. The dispute was heard at first instance by Rose J ([2014] EWHC 3010 (Ch)). The Court of Appeal heard the matter in two stages: first considering domestic construction ([2016] EWCA Civ 938) and then considering EU law arguments, giving a final Court of Appeal judgment ([2017] EWCA Civ 1584) which concluded the restriction could be justified because HMRC required mutual assistance arrangements. The case came to the Supreme Court on appeal.

Issues framed by the court. The Supreme Court identified two principal issues: (1) whether Jersey should be treated, for the purposes of article 56 EC, as part of the United Kingdom or as a third country; and (2) if Jersey is a third country for these purposes, whether the denial of relief under section 23 could be justified under EU law (in particular whether the absence of a mutual assistance agreement could justify the restriction).

Reasoning and decision. The court undertook a detailed analysis of the territorial scope of EU law, considering article 299 EC/article 355 TFEU, Protocol 3 to the 1972 Act of Accession, and CJEU jurisprudence (Van der Kooy, Jersey Produce, Prunus, X BV, Gibraltar Betting and others). It adopted the context‑specific approach of the Court of Justice: where a particular Treaty provision does not apply to a territory (by virtue of the accession arrangements), transactions to or from that territory are not to be treated as internal to the member state but as movements involving a third country for the purposes of that provision. Applying that approach, and in light of Prunus and Jersey Produce, the court concluded that because the free movement of capital rules did not apply in Jersey, a transfer of capital from the United Kingdom to Jersey was a movement of capital to a third country and thus fell within article 56.

The court then addressed the domestic law issue. It concluded that the Dreyfus gloss (limiting the definition of charity to trusts governed by UK law and subject to UK jurisdiction) produced a restriction incompatible with article 56 and therefore could not be applied in cases within the scope of that article. As article 56 is directly applicable in domestic law, the court disapplied the Dreyfus gloss and applied section 23 without that restriction. Since the Coulter Trust satisfied the statutory conditions on their face, relief under section 23 was available and HMRC’s determination was unlawful. The court therefore allowed the appeal. The court declined to make a preliminary reference to the Court of Justice on the territorial point.

Wider context. The court commented on the systematic approach of the CJEU to territorial scope and declined to import into domestic tax legislation a judicially created condition (mutual assistance agreement requirement) not present on the face of the statute.

This was an appeal which the Supreme Court allowed. The court held that article 56 EC applied to transfers of capital from the United Kingdom to Jersey because EU free movement of capital rules did not apply in Jersey and therefore such transfers are movements to a third country. The court held that the judicial gloss in Dreyfus (limiting the definition of 'charity' to trusts governed by UK law and subject to UK jurisdiction) was incompatible with article 56 and must be disapplied in cases within the scope of that article; applying section 23 of the Inheritance Tax Act 1984 without that gloss, the Coulter Trust qualified for inheritance tax relief. The appeal was allowed for that reason.

Appeal from the Court of Appeal ([2017] EWCA Civ 1584). First instance decision: Rose J, High Court (Chancery Division) [2014] EWHC 3010 (Ch). The Court of Appeal considered domestic construction in [2016] EWCA Civ 938 and later considered EU law arguments in [2017] EWCA Civ 1584.