Why the recent High Court decision is less dramatic than it might first seem. Peter Vaines, partner, Squire Patton Boggs reports
I read the recent decision in Routier v HMRC [2014] EWHC 3010 with considerable interest – and misgivings. It concerned a bequest by a Mrs Coulter on her death in 2007 to a trust for the benefit of a hospice in Jersey. Exemption from inheritance tax was claimed under IHTA 1984 s 23 as being a gift of property to a charity or to be held on trust for charitable purposes only.
There was no dispute that the objects of the trust and of the Jersey hospice were charitable purposes under English law. However, this was not enough, because the trust was subject to Jersey law.
The High Court rejected the claim for inheritance tax exemption, on the grounds that the trust did not qualify as a charity because it was not ‘established in the UK’. The definition of a charity in s 23 was derived from the income tax definition, which at that time was found in ITA 2007 s 989, being a body of persons established for charitable purposes only. This conclusion was based on the decision in Camille and Henry Dreyfus Foundation Inc. v HMRC [1956] AC 39, where the House of Lords held that, to be a charity for this purpose, it was necessary for it to be subject to English law – thereby excluding foreign charities. (That is not to say that the objects of the charity had to be in the UK. However, the charity had to be subject to English law.)
This sounds rather alarming – until you look at the date. This bequest took place in 2007 and since that time the law has changed significantly. In 2009, following decisions in the European Court that the UK was not permitted to impose a territorial restriction on the s 23 exemption, the European Commission insisted that charities established in another member state should qualify for the exemption. Accordingly, FA 2010 Sch 5 introduced a new definition of charity to include charities established in the EU and to other territories specified by regulations, which so far includes Norway, Iceland and Liechtenstein. This definition was subsequently applied to inheritance tax on 1 April 2012. However, wherever it is established, the charity must be subject to a court of corresponding jurisdiction with respect to charities in the other territory – and it must, of course, also fulfil the requirement that its purposes are exclusively charitable under English law.
Accordingly, this decision in Routier is less dramatic than it seems. It followed the traditional legal principles and the practice of HMRC as it existed before 2009. So the position regarding charities in the EU is clear, but it remains a matter of uncertainty how far the old law still applies to charities established outside the EU, because some of these new rules may well extend beyond Europe.
Why the recent High Court decision is less dramatic than it might first seem. Peter Vaines, partner, Squire Patton Boggs reports
I read the recent decision in Routier v HMRC [2014] EWHC 3010 with considerable interest – and misgivings. It concerned a bequest by a Mrs Coulter on her death in 2007 to a trust for the benefit of a hospice in Jersey. Exemption from inheritance tax was claimed under IHTA 1984 s 23 as being a gift of property to a charity or to be held on trust for charitable purposes only.
There was no dispute that the objects of the trust and of the Jersey hospice were charitable purposes under English law. However, this was not enough, because the trust was subject to Jersey law.
The High Court rejected the claim for inheritance tax exemption, on the grounds that the trust did not qualify as a charity because it was not ‘established in the UK’. The definition of a charity in s 23 was derived from the income tax definition, which at that time was found in ITA 2007 s 989, being a body of persons established for charitable purposes only. This conclusion was based on the decision in Camille and Henry Dreyfus Foundation Inc. v HMRC [1956] AC 39, where the House of Lords held that, to be a charity for this purpose, it was necessary for it to be subject to English law – thereby excluding foreign charities. (That is not to say that the objects of the charity had to be in the UK. However, the charity had to be subject to English law.)
This sounds rather alarming – until you look at the date. This bequest took place in 2007 and since that time the law has changed significantly. In 2009, following decisions in the European Court that the UK was not permitted to impose a territorial restriction on the s 23 exemption, the European Commission insisted that charities established in another member state should qualify for the exemption. Accordingly, FA 2010 Sch 5 introduced a new definition of charity to include charities established in the EU and to other territories specified by regulations, which so far includes Norway, Iceland and Liechtenstein. This definition was subsequently applied to inheritance tax on 1 April 2012. However, wherever it is established, the charity must be subject to a court of corresponding jurisdiction with respect to charities in the other territory – and it must, of course, also fulfil the requirement that its purposes are exclusively charitable under English law.
Accordingly, this decision in Routier is less dramatic than it seems. It followed the traditional legal principles and the practice of HMRC as it existed before 2009. So the position regarding charities in the EU is clear, but it remains a matter of uncertainty how far the old law still applies to charities established outside the EU, because some of these new rules may well extend beyond Europe.
