Many readers will already know of our success in persuading the Supreme Court to overturn the findings of the lower courts and to rule that the late Beryl Coulter’s generous gift to fund housing for the elderly in her native Jersey was exempt from Inheritance Tax (IHT).
Mrs Coulter died in October 2007, but our firm wasn't involved until nearly three years after Mrs Coulter’s death. In the two months since the Supreme Court’s judgement, we have given thought to two other issues:
- What would the position be if Mrs Coulter had died today?
- What could have been done to avoid 12 years’ argument with HMRC?
Mrs Coulter lived in Jersey all her life, and, under her Will, her assets were to be used for the benefit the elderly of her home parish, St Ouen. HMRC argued that the charity exemption was restricted to UK charities and that IHT must be paid on her UK assets. The Supreme Court ruled that this was wrong, because of European Union law. So Mrs Coulter’s whole estate was free of IHT.
The meanings of 'charity' in 2007 and today
As IHT law stood when Mrs Coulter died, there were no territorial restrictions in the legislation. The restriction to the UK, for which HMRC argued, came from a 1950s income tax case.
The law on what is a charity, for virtually all tax purposes, was amended by Finance Act 2010 Schedule 6. In order to obtain charity tax relief a trust or other body of persons must be established for charitable purposes only and must satisfy:
- A 'jurisdiction condition' – the entity must be based in the EU or in Norway or Iceland
- A 'registration condition' – it must be registered as required in its home jurisdiction (so with the equivalent of the Charity Commission in England and Wales), and
- A 'management condition' – fit and proper persons must manage the charity.
In our case, the Supreme Court directed that the law as it stood in 2007 must be made compliant with EU law by disapplying the 1950s case law. This, on its own, made Mrs Coulter’s gift exempt from IHT.
We suspect that HMRC might now argue that the conditions in Finance Act 2010 are compliant with EU law. Since Jersey does not meet the 'jurisdiction condition' HMRC might be able to argue successfully today that a gift to a Jersey charity has no IHT exemption.
The meanings of “on trust for charitable purposes” in 2007 and today
Throughout our appeal against HMRC’s refusal of charity relief we argued that, even if the meaning of 'charity' excluded non-UK charities, because of the 1950s case, we were still entitled to the relief. Our argument was based on part section 23(6) of the Inheritance Tax Act 1984.
Section 23(6) said in 2007, and still says today, that, for the purposes of the IHT exemption, property is to be treated as given to charity ‘if it… is held on trust for charitable purposes only’. This, we argued, was exactly our case: Mrs Coulter’s gift was not to an existing charity, but provided for her estate to be used for particular charitable purposes.
It was clear from other case law that 'charitable purposes' can be carried on anywhere in the world. If this weren't the case, how could international charities such as Oxfam or Save the Children carry on charitable work outside the UK?
Both the High Court and the Court of Appeal disagreed with us. We thought, at the time, that they were wrong, and still argued this at the Supreme Court. Because they found in our favour under EU law, the Supreme Court said that they didn't need to rule on the point.
What is odd is that, while HMRC might be able to argue today that the Finance Act 2010 definition of 'charity', which excludes Jersey, is compliant with EU law, the same Finance Act 2010 paragraph refers to the Charities Acts for the meaning of 'charitable purpose' and says that this 'applies regardless of where the body of persons or trust in question is established'.
This covers charitable bodies both within and outside the UK and within and outside the EU. With this clear statutory statement, we think the High Court and the Court of Appeal would have agreed with us that Mrs Coulter’ gift for charitable purposes was IHT exempt, if the present rules had been in force when Mrs Coulter died.
What should have been done?
Fortunately, it isn't necessary to spend time and energy arguing for 12 years, as we had to do with HMRC.
The following course of action, within two years after death, should be effective to take a gift in a Will to a non-UK charity out of IHT:
- Form a UK charity with the charitable objects expressed in the Will, and
- Put in place a variation within IHTA section 142 in favour of the new UK charity (this will, of course, need the agreement of the original legatee, and may need a court order in the legatee’s home jurisdiction).
An alternative is to redirect a gift to a body such as the Charities Aid Foundation. The Charities Aid Foundation have confirmed to us that, subject to their being satisfied that the relevant organisation satisfies their charity verification process, an overseas organisation can be the end beneficiary. We understand that they'll always do their best to comply with a donor’s wishes.
Published: December 2019
A monthly briefing from Irwin Mitchell
December 2019
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