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

Whether a territory associated with an EU member state is a third country for a particular freedom depends on whether the relevant EU rules apply in that territory. Jersey was therefore a third country for the free movement of capital.

EU law takes priority over inconsistent domestic law, whether legislative or judicial in origin. The judge-made restriction confining inheritance tax charitable relief to trusts governed by United Kingdom law could not apply to a transfer protected by article 56 EC. The court could not substitute a different restriction requiring a mutual assistance agreement when Parliament had enacted no such condition.

The executors of a Jersey testatrix claimed inheritance tax relief for a residuary gift held on a Jersey-law trust for purposes which were exclusively charitable under English law. HMRC refused relief under section 23 of the Inheritance Tax Act 1984, relying on a judicial restriction which confined qualifying trusts to those governed by United Kingdom law and subject to United Kingdom courts.

Rose J upheld HMRC’s decision, and the Court of Appeal upheld the domestic construction. Following a second hearing, the Court of Appeal held that Jersey was a third country for article 56 EC but dismissed the appeal because no inheritance-tax mutual assistance agreement was in force at the testatrix’s death: [2017] EWCA Civ 1584.

The Supreme Court considered whether Jersey was a third country for the free movement of capital and whether the refusal of relief was justified under EU law.

1. Appeal allowed unanimously. Lord Reed and Lord Lloyd-Jones delivered a joint judgment, with which Lady Hale, Lord Carnwath and Lord Hodge agreed.

2. Whether an associated territory is a third country is context-specific. The decisive consideration is whether the EU rules governing the relevant freedom apply there under the applicable Treaty arrangements. The closeness of the territory’s constitutional or economic relationship with a member state does not displace that scheme. Where the relevant rules apply both in the member state and the associated territory, they may be treated as one member state for that purpose. Where the rules do not apply in the territory, a transfer between them is not purely internal.

3. The EU rules on free movement of capital did not apply in Jersey. Jersey was therefore a third country for a transfer of capital from the United Kingdom. The decision in Prunus SARL v Directeur des services fiscaux was determinative. Article 56 EC applied to the gift, and no preliminary reference to the CJEU was required.

4. Section 23 of the Inheritance Tax Act 1984, read on its face and with section 272 and section 989 of the Income Tax Act 2007, did not discriminate between domestic and overseas charities. The relevant restriction arose solely from the gloss placed on the statutory definition in Camille & Henry Dreyfus Foundation Inc v Inland Revenue Comrs [1956] AC 39. That gloss confined relief to trusts governed by the law of a part of the United Kingdom and subject to United Kingdom courts.

5. Article 56 EC was directly applicable and took priority over inconsistent national law, whether judicial or legislative. The Dreyfus gloss could not therefore be applied to section 23 in a situation within article 56. Without that gloss, the trust satisfied the statutory conditions and qualified for relief.

6. The Court of Appeal could not read into section 23 a condition requiring a mutual assistance agreement with the relevant third country. No such restriction had been enacted, and the possible compatibility of a hypothetical restriction with EU law did not authorise its judicial creation. It was unnecessary to decide whether the Dreyfus gloss applied to both limbs of section 23(6), or whether a legislated mutual-assistance condition would have been justified.

1. United Kingdom Supreme Court: The appeal was allowed unanimously. The Court of Appeal’s decision could not stand: [2019] UKSC 43 .

2. Court of Appeal, second hearing: The court held that Jersey was a third country for article 56 EC but dismissed the appeal because no relevant mutual assistance agreement existed at the testatrix’s death: [2017] EWCA Civ 1584 ; [2018] 1 WLR 3013; [2018] STC 910.

3. Court of Appeal, first hearing: The court upheld the domestic-law construction confining relief to trusts governed by United Kingdom law and subject to United Kingdom courts: [2016] EWCA Civ 938 ; [2017] PTSR 73; [2016] STC 2218.

4. High Court: Rose J upheld HMRC’s construction of section 23 of the Inheritance Tax Act 1984: [2014] EWHC 3010 (Ch) ; [2015] STC 451.