Inheritance Tax  

HMRC loses inheritance tax case against Jersey trust

HMRC loses inheritance tax case against Jersey trust

HM Revenue and Customs has missed out on £600,000 in inheritance tax after the Supreme Court ruled that a gift to a charitable trust was exempt in Jersey.

In the case Routier & Venables v HMRC, Beryl Coulter decided to leave her UK estate to a Jersey trust upon her death, as set out in her will.

When Ms Coulter died in October 2007 her UK estate, which was valued at £1.8m, was passed to a trust to build homes for the elderly in Jersey.

HMRC said if the trust was based in the UK and governed by UK law it would be exempt from inheritance tax, but as the trust Ms Coulter chose was Jersey-based it did not qualify for this exemption.

But the Jersey-based trustees have now successfully appealed several rulings which had held that Mrs Coulter’s estate must pay nearly £567,000 in inheritance tax.

The case was brought to the Supreme Court after 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 in place for the UK and Jersey to cooperate with one another.

At the time of Ms Coulter’s death, there was a treaty in force between the UK and Jersey which included provision for the exchange of information relating to income tax but a similar treaty for inheritance tax didn’t come into force until 2009.

In the latest hearing the Supreme Court considered two key points.

The first was whether Jersey was a third country under the EU’s core principle that there should be no barriers to freedom of movement of capital.

It also considered that in the case that Jersey was a third country, whether HMRC’s interpretation of the inheritance tax rules was justified.

The Court of Appeal’s ruling that Jersey was a third country was affirmed, so therefore the Supreme Court found that the principle of free movement must be applied. 

It also found that HMRC’s decision to charge inheritance tax of 40 per cent was not justified.

The Jersey government supported the executors' argument that as Ms Coulter lived in Jersey, the inheritance tax exemption for trusts that are clearly charitable should apply in Jersey as it does in the UK.

Anthony Nixon, a tax, trusts and estates partner at Irwin Mitchell who led the case with Clementine Burch, a senior associate in the litigation team, 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 European Union member states and third countries, and that Jersey was a third country for these purposes."

He added: “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.