Upon Beryl Coulter’s death in October 2007, her £1.8m ($2.3m, €2.1m) UK estate went to a trust to build homes for the elderly in Jersey, which was exclusively charitable under English law.
HM Revenue and Customs (HMRC) agreed that if this were a trust governed by UK law it would be free of inheritance tax but claimed that Coulter’s Jersey-based trust did not qualify.
The UK tax collector’s interpretation was based on a case called “Dreyfus”, which came before the House of Lords in 1956.
The House of Lords decided that the word “charity” could apply only to bodies of persons or trusts established in the UK.
Therefore, HMRC said it would be liable to pay £567,000 in IHT
Originally, the court of appeal ruled that a restriction to UK charities was justified by the need for “effective fiscal supervision”; because, at the time, there was no agreement for mutual assistance between the UK and Jersey.
This was appealed by law firm Irwin Mitchell on the basis that it is incompatible with article 56 of the Treaty Establishing the European Community (EC), (now article 63 of the Treaty on the Functioning of the European Union) (TFEU).
It prohibits restrictions on the free movement of capital between EU member states, and between member states and third countries.
HMRC said that article 56 had no application to the facts of this case, on the basis that, although Jersey is not a part of the UK for the purposes of Section 23 of the Inheritance Tax Act 1984, a movement of capital between the UK and Jersey should be regarded as an internal transaction taking place within a single member state.
The issues arising in the appeal were:
- Whether Jersey forms part of the United Kingdom for the purposes of article 56 EC, and, if not;
- Whether the refusal of relief under section 23 of the Inheritance Tax Act, in respect of Coulter’s gift of her residuary estate to the Coulter Trust, is justifiable under EU law.
The supreme court deliberated on two key issues: whether Jersey was a “third country” under the EU’s core principle that there should be no barriers to freedom of movement of capital and if Jersey was indeed a “third country”, whether the HMRC’s restrictive interpretation of the IHT relief was justified.
The court concluded that article 56 EC applied to Coulter’s gift of assets in the UK to trustees in Jersey and the refusal of relief from IHT on that gift under section 23 of the Inheritance Tax Act was in breach of article 56, therefore the appeal should be allowed.
Anthony Nixon, a tax, trusts and estates partner at Irwin Mitchell, said: “We have finally, and successfully, reached the end of what has been a long story.
“The executors of Mrs Coulter’s Will challenged their liability for inheritance tax, because they believed that it constituted an unlawful and unjustifiable restriction on the free movement of capital between EU member states and third countries, and that Jersey was a third country for these purposes.
“The Jersey government supported our argument. Mrs Coulter lived in Jersey and we considered that the inheritance tax exemption for trusts that are clearly charitable should apply in Jersey as it does in the UK.
“HMRC has for many years interpreted the charity exemption for a gift to a trust for charitable purposes as requiring the trust to be subject to the jurisdiction of the UK courts. The supreme court has confirmed our view that HMRC were wrong.
“So, after a long fight, Mrs Coulter’s estate is free of tax and can all be used for the elderly in her Jersey parish, exactly as she wished. We are grateful to the judges for hearing our clients’ case and pleased that they have now ruled in our favour.”
The appellants (executors) were domiciled in Jersey, and the proper law of the trust was specified in the will as the law of Jersey.
At the time of Coulter’s death, a treaty was in force between the UK and Jersey which included provision for the exchange of information relating to income tax, and in 2009, the UK/Jersey Tax Information Exchange Agreement came into force, which included provision for the exchange of information relating to IHT.
On 1 October 2010, the appellants retired as trustees (but not as executors) and were replaced by a UK resident trustee, while a few days later, the Will was amended to make the proper law of the trust, the law of England and Wales.
On 14 February 2014, the Coulter Trust was registered as a charity under the law of England and Wales and section 23 of the Inheritance Tax Act 1984 provides for an exemption from IHT in respect of gifts to charities.
On 29 May 2013, HMRC determined that Coulter’s gift of her residuary estate to the Coulter Trust did not qualify for relief under section 23, as it had not been given to a charity within the meaning of that provision.
That conclusion was based on the Coulter Trust was governed by the law of Jersey as at the date of Coulter’s death, and on a structure of section 23 which limited relief to trusts governed by the law of a part of the UK.