Under section 23 of the Inheritance Act 1984 (IHTA) transfers to charities are exempted from Inheritance Tax (IHT).  The wording is fairly simple, and no geographical limitations are provided by the act to limit the exemption.

In 2007 a lady died and left her residuary estate to a charitable trust that was formed under the laws of Jersey.  HMRC contended that as the charitable trust was formed under laws not from a part of the UK then the charity did not qualify for the exemption.  IHT was due on the transfer to the charity in excess of £500k.

HMRC relied on a case from 1955 judged by the House of Lords.  In this case a charity based in New York applied to receive royalties gross of income tax withheld by the UK company payer.  The House of Lords determined that when construing section 37 of the Income Tax Act 1918 (that has now become section 989 of Income Taxes Act 2007) that “any body of persons or trust established for charitable purposes only are limited to bodies and trusts subject to the jurisdiction of the Courts of the UK”.  The application to receive income gross of income tax was refused.  HMRC contended that application of this judicial gloss to section 23 of IHTA meant that the transfer was not exempted from IHT.

The executors of the estate held that the application of the judicial gloss was a restriction on the free movement of capital to a third country and therefore incompatible with Article 56 of the Treaty Establishing the European Community (now article 63 of the Treaty on the Functioning of the European Union).

The Supreme Court (SC) agreed with the executors.  First the SC determined that Jersey was to be considered a third country for the purposes of Article 56 and that a transfers between Jersey and the UK are not to be considered internal transfers within a member state. The SC then found that the judicial gloss from the 1955 case is indeed incompatible with Article 56 and that there was no justifiable reason for the restriction.

The SC allowed the executors’ appeal and the transfer to the charity was considered exempt.

The decision can be found at: Routier and another (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) – The Supreme Court

Planning for inheritance tax can be complicated matter as the above case highlights, though this case has helped simplify the definition of charities.  Please do contact us where you have concerns about inheritance tax or where any submitted accounts to HMRC have been queried.