Routier & anr v HMRC [2017] WTLR 1119

Analysis

The appeal concerned the restriction (the Restriction) imposed by s23 of the Inheritance Tax Act 1984 (IHTA), as interpreted by the Court of Appeal in an earlier hearing of the appeal, on IHT relief for legacies and gifts to charities, to legacies and gifts to UK charities subject to the supervision of the UK courts. The question was whether the Restriction violated the EU law principle of freedom of movement of capital so as not to be enforceable in relation to a legacy of an estate with assets situate in the UK to a Jersey charity.

There were three sub-issues:

1. (1) Was Jersey to be treated as part of the UK for the purposes of this question (so that EU law free movement of capital principles did not apply), or was it to be treated as a third country?
2. (2) Was the Restriction justified in EU law on the grounds of effective fiscal supervision (‘EFS’)?
3. (3) Could s23 of the IHTA be interpreted in conformity with EU law?

Ms Beryl Coulter had died in Jersey on 9 October 2007 (before the Lisbon Treaty came into force), leaving her residuary estate on trust (the Coulter Trust). The Coulter Trust was established under and subject to Jersey law. HMRC determined that the appellant executors were liable for IHT on the residuary gift to the Coulter Trust without relief under s23 of the IHTA because the Coulter Trust was not a charity for the purposes of the law of the UK. The Coulter Trust has since been registered as a charity under the law of England and Wales.

The High Court and the Court of Appeal determined that s23 of the IHTA contained two requirements (being the Restriction): that the trust was established under UK law and that the UK courts would have jurisdiction over it (Rose J [2014] EWHC 3010 Ch and [2016] EWCA Civ 938 Moore-Bick VP, Tomlinson and Kitchin LJJ).

As to the freedom of movement of capital (Article 56 of the EC Treaty, now Article 63 TFEU), it was common ground that Article 56 EC applied to gifts to charities and that limitation of tax relief to gifts to UK bodies restricted free movement of capital. A restriction on free movement of capital could be justified where the aim of the restriction is to ensure the EFS.

The 4MLD required trustees of (among other bodies) charities to register particulars of the trust with HMRC. A competent authority could request information shown on that register and HMRC has reciprocal rights in other EU and EEA states.

Subsequent to Mrs Coulter’s death, Parliament had changed the law so that it was sufficient for inheritance tax relief if the charity was regulated by the courts of one of the member states of the EU, Norway, Iceland or Liechtenstein.

The Court of Appeal held (per Arden LJ):

1. (1) As to the first issue, the analysis of the CJEU in the Jersey Potatoes case was consistent only with the conclusions that Jersey (1) was not a part of the UK for the purposes of the constitutional arrangements of the UK, but (2) is to be treated as part of the UK for the purposes of those Treaty provisions which are applicable to it. It was clear that in relation to other Treaty provisions Jersey was not to be treated as part of the UK. The question of whether Jersey was to be treated as part of the UK for the purposes of Article 56 EC should be answered in the negative: Jersey should be treated as a third country for Article 56 EC purposes such that the principle of freedom of movement of capital applied. A reciprocity requirement could not be reconciled with unilateral liberalisation.
2. (2) As to the second issue:
3. a. There was no conflict between Rimbaud, Haribo and Welte as to the legal principles to be applied. The critical issue was whether the member state could show that the measure which restricted freedom of movement of capital was proportionate. The law on proportionality was clear. Whenever a member state imposed a direct tax, it had to do so in accordance with the principles of EU law: the same applied in relation to an exemption. Those principles included proportionality. Section 23 IHTA made no attempt to extend the range of charities in accordance with the principle of free movement of capital.
4. b. In principle, a taxing authority should have the right to verify information provided about an overseas charity. The court had not been informed that there was any way other than a mutual assistance agreement in which the taxing authority of a state could make checks. If the power to verify information did not exist, s23 IHTA would be a ‘fertile ground for abuse’. HMRC was entitled to refuse relief unless there was a mutual assistance agreement between the UK and the country in which the charity was based.
5. c. It was irrelevant that the Coulter Trust had met the conditions needed to bring the gift within s23 IHTA after the date of death: the requirements of s.23 had to be met at the date of death.
6. d. In conclusion, s23 IHTA could not in conformity be limited by the Restriction but it would be justified for s23 IHTA to contain a right for HMRC to verify information about an overseas charity by reference to a mutual assistance agreement. That meant the present appeal failed because there was no mutual assistance agreement between the UK and Jersey when Mrs Coulter died. Accordingly, the question was whether s23 IHTA could be interpreted so that relief could be extended to other bodies which are charitable if UK law had applied to them so far as necessary to enable s23 IHTA to comply with EU law. That matter fell under issue 3.
7. (3) As to the third issue, where a statute did not fulfil the requirements of EU law, the courts could interpret it so far as possible so that it complied with EU law. However, the courts were not entitled to reach an interpretation that went against the grain of the legislation. The interpretation proposed by HMRC did not go against the grain of the legislation. The purpose of the Restriction was to ensure that the valuable relief from IHT which s23 IHTA conferred was not abused, as it might be if it could be claimed by an entity whose credentials as a charity HMRC could not satisfactorily check. Section 23 IHTA was to be read as if it contained the qualification that it was subject to the principle of freedom of movement of capital. HMRC’s interpretation went no further than that principle required.

(4) (Per Green J) HMRC’s case on proportionality at the level of principle and abstraction rather than factual or expert evidence was not an ‘insuperable problem’.

a. It was possible to infer from the package of legislation adopted by Parliament on exemptions from IHT that it addressed itself to the existing case law of the CJEU.

1. b. The CJEU has, over a lengthy series of cases, addressed itself to the existence of mutual assistance treaties, conventions and agreements as the proper place to draw the proportionality line. Once those issues of law had been resolved it was proper to conclude that the CJEU had addressed itself squarely to proportionality and provided the solution.
2. c. It followed that there was no need for HMRC to come to court with detailed evidence to establish proportionality and it was entitled to argue the case by reference to the authorities.
3. (5) The appeal was dismissed.

JUDGMENT LJ ARDEN 1. ISSUES FOR DETERMINATION 1. INHERITANCE TAX, GIFTS TO CHARITIES AND FREEDOM OF CAPITAL [1] This adjourned appeal is about the restriction imposed by s23 of the Inheritance Tax Act 1984 ‘IHTA’, as interpreted by this Court on an earlier hearing of this appeal, on inheritance tax relief for legacies and gifts …

Continue reading "Routier & anr v HMRC [2017] WTLR 1119"