Introduction

In the landmark case of Routier & Anor v. Revenue and Customs ([2019] UKSC 43), the United Kingdom Supreme Court addressed significant issues concerning the intersection of domestic inheritance tax legislation and European Union (EU) law. The appellants, executors of Mrs. Beryl Coulter's estate, sought relief from inheritance tax under section 23 of the Inheritance Tax Act 1984, which provides exemptions for gifts to charities. The central conflict arose from the fact that the Coulter Trust, established for charitable purposes, was governed by the law of Jersey, an associated territory of the UK, rather than English law. The crux of the case revolved around whether Jersey should be treated as a third country under EU law, particularly in light of Article 56 of the Treaty on the Functioning of the European Union (TFEU), which prohibits restrictions on the free movement of capital between member states and third countries.

Summary of the Judgment

The Supreme Court unanimously decided in favor of the appellants, overturning the decision of Her Majesty's Revenue and Customs (HMRC). The Court held that Jersey must be considered a third country for the purposes of Article 56 TFEU, thereby prohibiting HMRC's refusal of inheritance tax relief based solely on the trust being governed by Jersey law. The judgment emphasized that restrictions on the free movement of capital, such as the denial of tax relief, cannot be justified under EU law unless they meet strict criteria for justifiability. Consequently, the Coulter Trust qualified for the inheritance tax exemption, aligning domestic law with EU principles.

Analysis

Precedents Cited

The judgment extensively referenced several key cases to establish the interpretation of EU law in relation to associated territories:

• Jersey Produce Marketing Organisation Ltd v States of Jersey (Case C-293/02): Established that for specific EU provisions, Jersey is to be treated as part of the UK.
• Prunus SARL v Directeur des services fiscaux (Case C-384/09): Clarified that Overseas Countries and Territories (OCTs) like the British Virgin Islands are treated as third countries under Article 56 TFEU.
• X BV v Staatssecretaris van Financiën (Cases C-24/12 and C-27/12): Reinforced that movements of capital between the Netherlands and the Netherlands Antilles are considered transactions between a member state and a third country.
• R (The Gibraltar Betting and Gaming Association Ltd) v Revenue and Customs Comrs (Government of Gibraltar intervening) (Case C-591/15): Highlighted the unique status of Gibraltar and its treatment under EU law regarding the free movement of services.
• Camille & Henry Dreyfus Foundation Inc v Inland Revenue Comrs (1956): An older case interpreted UK tax law in a manner that conflicted with EU principles, which the Supreme Court deemed incompatible with Article 56 TFEU.

These precedents collectively underscore the Court's commitment to ensuring that domestic tax laws do not infringe upon EU-wide principles, especially concerning the free movement of capital.

Legal Reasoning

The Supreme Court's legal reasoning hinged on the interpretation of Article 56 TFEU, which prohibits restrictions on capital movements both between member states and between member states and third countries. The Court examined whether Jersey should be classified as a third country or treated as part of the UK (a member state) under this article.

Drawing from the CJEU’s consistent approach, the Court determined that the treatment of associated territories like Jersey depends on the specific EU provisions and their applicability. In this case, since EU rules on the free movement of capital do not extend to Jersey, it must be treated as a third country. This classification directly impacted the inheritance tax relief, as denying relief based on Jersey governance constituted an unlawful restriction on capital movement.

Furthermore, the Court addressed the domestic judicial interpretation that had previously limited the scope of charity relief to trusts governed by UK law. By asserting that Article 56 TFEU takes precedence, the Court invalidated the restrictive domestic interpretation, thereby aligning UK law with EU principles.

Impact

The decision has far-reaching implications for similar cases involving associated territories and the application of EU law in the UK. It reinforces the supremacy of EU principles over domestic interpretations when conflicts arise. Additionally, it clarifies the status of territories like Jersey in the context of capital movements, ensuring that tax reliefs and exemptions cannot be arbitrarily restricted based on jurisdictional governance if such restrictions contravene EU law.

This judgment also sets a precedent for future tax-related cases involving trusts and charities established under the laws of associated territories, emphasizing the necessity for compliance with overarching EU mandates.

Complex Concepts Simplified

Conclusion

The Supreme Court's decision in Routier & Anor v. Revenue and Customs marks a pivotal moment in the alignment of UK domestic law with EU principles, specifically concerning the free movement of capital. By recognizing Jersey as a third country under Article 56 TFEU, the Court ensured that charitable trusts governed outside the UK are not unjustly excluded from tax reliefs solely based on their jurisdictional governance. This judgment underscores the importance of adhering to broader legal frameworks over restrictive domestic interpretations, paving the way for more equitable treatment of trusts and charities across associated territories.

Moreover, the case emphasizes the ongoing relevance of EU law principles even post-Brexit, highlighting the intricate balance between national sovereignty and international legal obligations. As such, legal practitioners and entities dealing with cross-jurisdictional trusts and charities must remain cognizant of both domestic and overarching legal standards to ensure compliance and optimize tax relief opportunities.