Capital Gains?

Factual background

In 2007 Beryl Coulter died in Jersey, and left her residuary estate in the UK on trust for either the building of homes for the elderly of the parish of St Ouen, or to Jersey Hospice Care. Her will was drafted to be governed by the law of Jersey.  As the gift was for charitable purposes, her executors (the “Appellants”) considered it should be exempted from inheritance tax under s.23 of the Inheritance Tax Act 1984.  Her Majesty’s Revenue & Customs (“HMRC”) disagreed with this and determined that the gift was liable to inheritance tax of approximately £600,000.

First instance decision

The Appellants appealed this decision to the High Court, but the judge found for HMRC. It was held that, for the exemption to apply, the gift must be for charitable purposes under UK law and the relevant trust must be subject to the jurisdiction of a UK court (which was not the case for Mrs Coulter’s trust).

Court of Appeal

The Appellants appealed to the Court of Appeal and in 2016 that Court upheld the High Court decision. There were additional points of law raised which neither party was in a position to develop during the hearing. The appellants contended that s.23 as construed by HMRC would constitute an unlawful restriction on the free movement of capital between European Union member states and third countries under Article 63 of the Treaty on the Functioning of the European Union (“TFEU”).  The Court directed it would deal with the appeal in two parts and it was not until 2017 that the Court heard argument on the three outstanding questions of law:

1. Is Jersey to be treated as part of the UK or as a third country?
2. Is the Restriction treated as justified in EU law on the grounds of effective fiscal supervision?
3. If so, can s.23 be interpreted in conformity with EU law?

Free movement of capital is the only EU freedom which expressly benefits third countries as well as member states. Jersey’s Attorney General, Robert Macrae QC, was represented as an intervener in the hearing and argued that Jersey’s status was that of a ‘third country’, and that the EU Commission had recognised it as such in decisions in other areas.  HMRC argued that the Island was not a third country and that its constitutional relationship with the United Kingdom meant that the relationship was a purely internal one for the purpose of capital movement.  They said it was not clear whether the island qualified for the benefit and that the issue should be sent to the European Court of Justice to decide.

In its 2017 judgment, the Court of Appeal confirmed that a restriction on charitable reliefs to UK charities was an unlawful restriction on the right to free movement of capital, but held that it is lawful for the UK to restrict relief to those charities based in a jurisdiction where there is a mutual assistance agreement in place with the UK. This meant that the executors’ appeal was dismissed and HMRC was entitled to inheritance tax on the gift. However, importantly for Jersey, it ruled the island was to be treated as a ‘third country’ and therefore it should be able to benefit from an unrestricted flow of money from the UK and other members of the EU.

It was called “a landmark constitutional decision for Jersey”  by the Law Officers’ Department.  They issued a statement at the time to explain the significance of the ruling and said: “the judgment will prevent unnecessary uncertainty for Jersey as Brexit negotiations continue”.

Supreme Court

The ruling was appealed to the Supreme Court. The Court granted permission to intervene to the Attorney General because of the importance of the matter to the island.  A hearing took place on 2 and 3 April 2019.  The written judgment has not yet been published [and the ultimate ruling on the inheritance tax issue is not known] but during the course of the hearing, the Court accepted the arguments on behalf of the Attorney General as to how the term ‘third country’ should be applied and understood.

The Attorney General commented:

“This issue had not been considered by the UK Courts before and both the Court of Appeal and the Supreme Court gave us permission to intervene and be heard because of the importance of the matter to the Island.

The Supreme Court has now given the last word on this issue. It is very helpful that Jersey’s status as a third country for the purpose of free movement of capital has been put beyond doubt.”

Conclusion

The Supreme Court ruling has confirmed that the provision on free movement of capital applies as between the UK and Jersey. If HMRC’s argument had succeeded, it could have meant Jersey being denied the protections guaranteed to third countries on capital movements. This would have put the island at a great disadvantage to its competitors in the international finance market.  The ruling has wider significance beyond this case.  It confirms that EU law defences are available to Jersey trusts and other entities and provides some certainty to the Island’s finance industry.