Routier and Another v Revenue and Customs Commissioners

Heard on 2 and 3 April 2019

Lord Reed AND( with whom Lady Hale, Lord Carnwath and Lord Hodge agree)

The appellants in this case are the executors of Mrs Beryl Coulter, who died in Jersey on 9 October 2007, leaving her residuary estate on trust for purposes which are agreed to be exclusively charitable under English law. The appellants were appointed under Mrs Coulter's will as the trustees. They were domiciled in Jersey, and the proper law of the trust (“the Coulter Trust”) was specified in the will as the law of Jersey. The estate included assets in the United Kingdom amounting to £1.7m.

At the time of Mrs Coulter's death, there was in force a treaty between the United Kingdom and Jersey which included provision for the exchange of information relating to income tax. In 2009 a further treaty (the United Kingdom/Jersey Tax Information Exchange Agreement) came into force, which included provision for the exchange of information relating to inheritance tax.

On 1 October 2010 the appellants retired as trustees (but not as executors) and were replaced by a UK resident trustee. On 12 October 2010 the will was amended so as to make the proper law of the trust the law of England and Wales. On 14 February 2014 the Coulter Trust was registered as a charity under the law of England and Wales.

Section 23 of the Inheritance Tax Act 1984 (“the Inheritance Tax Act”) provides for an exemption from inheritance tax in respect of gifts to charities. On 29 May 2013 the respondents, Her Majesty's Revenue and Customs (“HMRC”), determined that Mrs Coulter's gift of her residuary estate to the Coulter Trust did not qualify for relief under section 23, as it had not been given to a charity within the meaning of that provision. That conclusion was based on the fact that the Coulter Trust was governed by the law of Jersey as at the date of Mrs Coulter's death, and on a construction of section 23 which limited relief to trusts governed by the law of a part of the United Kingdom. On the basis that Jersey was not a part of the United Kingdom for the purposes of section 23, it followed that relief was not available. The amount of inheritance tax due, if relief is not available, is about £567,000.

The appellants have appealed against that determination on the basis that it is incompatible with article 56 of the Treaty Establishing the European Community (“EC”), now article 63 of the Treaty on the Functioning of the European Union (“TFEU”). As we shall explain, that provision prohibits restrictions on the free movement of capital between EU member states, and between member states and third countries. HMRC's primary response is that article 56 has no application to the facts of this case, on the basis that, although Jersey is not a part of the United Kingdom for the purposes of section 23, a movement of capital between the United Kingdom and Jersey should be regarded as an internal transaction taking place within a single member state. HMRC further argue that the restriction resulting from the adverse treatment of the Coulter Trust is in any event justifiable under EU law, in view of the fact that there was no mutual assistance agreement covering inheritance tax in force between the United Kingdom and Jersey at the date of Mrs Coulter's death.

The principal issues arising in the appeal are:

(1) whether Jersey forms part of the United Kingdom for the purposes of article 56 EC, and, if not,

(2) whether the refusal of relief under section 23 of the Inheritance Tax Act in respect of Mrs Coulter's gift of her residuary estate to the Coulter Trust is justifiable under EU law.

Article 56 EC (now article 63 TFEU) provides:

“(1) Within the framework of the provisions set out in this chapter, all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited.

(2) Within the framework of the provisions set out in this chapter, all restrictions on payments between member states and between member states and third countries shall be prohibited.”

It is common ground between the parties that whereas article 56 applies in the United Kingdom, it does not apply in Jersey, in the sense that Jersey is not required to comply with the provisions of article 56. It is also common ground between the parties that article 56 applies to gifts to charities and that the limitation of tax relief on a gift to the Coulter Trust would, if article 56 were engaged, amount to a restriction on the free movement of capital. Since Jersey is not a member state, the gift to the Coulter Trust was not a movement of capital between member states. The issue therefore turns on whether Jersey is to be regarded as a third country for the purposes of article 56.

The relationship between the Channel Islands (which include the Bailiwick of Jersey) and the United Kingdom in domestic constitutional law was considered in some detail in the judgment of Lady Hale in R (Barclay) v Lord Chancellor and Secretary of State for Justice (No 2) (Attorney General of Jersey intervening) [2014] UKSC 54; [2015] AC 276, paras 6 to 18. The Channel Islands are not part of the United Kingdom and have never been British colonies or dependent territories. They are Crown Dependencies which enjoy a unique relationship with the United Kingdom and the Commonwealth through the Crown in the person of the Sovereign. The prerogative powers of the Crown as regards Jersey are exercised by Order in Council.

The Channel Islands were originally part of the Duchy of Normandy. At the Norman conquest of England in 1066, the Duke of Normandy became the King of England. When France took possession of continental Normandy in 1204, the Channel Islands retained their allegiance to the King of England. By the Treaty of Paris, 1259 France relinquished any claim to the Channel Islands. The Treaty of Calais, 1360 confirmed that the King of England shall have and hold all the islands which he “now holds” ( Minquiers and Ecrehos case ( France v United Kingdom), ICJ Reports 1953, pp 47, 54). The relationship between the Channel Islands and the Crown has continued to observe the distinct laws and ancient customs of the Channel Islands which are rooted in Norman customary law. Successive sovereigns have confirmed by Royal Charter privileges and liberties to Jersey including an independent judicature. Jersey also has its own legislature.

Jersey is not an independent state in international law. The United Kingdom Government is responsible for the international relations and the defence of the Channel Islands. Under international law the United Kingdom Government has the power to extend to the Channel Islands the operation of a treaty which the United Kingdom has concluded.

Article 29 of the Vienna Convention on the Law of Treaties, 23 May 1969, provides that unless a different intention appears from a treaty or is otherwise established, a treaty is binding upon each party in respect of its entire territory. Article 299(1) EC (now article 355 TFEU) makes specific provision for the territorial scope of EU law. It provides that the EC Treaty applies to the EU member states including the United Kingdom of Great Britain and Northern Ireland. The remainder of article 299 then makes special provision for the extent to which EU law applies to a number of countries and territories which have links with EU member states.

Article 299(3) provides:

“The special arrangements for association set out in Part Four of this Treaty shall apply to the overseas countries and territories listed in Annex II to this Treaty.

This Treaty shall not apply to those overseas countries and territories having special relations with the United Kingdom of Great Britain and Northern Ireland which are not included in the aforementioned list.”

Annex II currently lists 21 territories as overseas countries and territories (“OCTs”). The list does not include the Channel Islands or the Isle of Man. Article 299(4) provides:

“The provisions of this Treaty shall apply to the European territories for whose external relations a member state is responsible.”

Article 299(6) makes express provision for the Channel Islands and the Isle of Man.

“Notwithstanding the preceding paragraphs:

…

(c) this Treaty shall apply to the Channel Islands and the Isle of Man only to the extent necessary to ensure the implementation of the arrangements for those islands set out in the Treaty concerning the accession of new member states to the European Economic Community and to the European Atomic Energy Community signed on 22 January 1972.”

Further provision is made in additional treaties, such as the various treaties of accession, to give effect to article 299 in each specific case. In the case of the Channel Islands, Protocol 3 to the Treaty of Accession, 22 January 1972 sets out the “arrangements for those islands”. Article 1(1) provides:

“The Community rules on customs matters and quantitative restrictions, in particular those of the Act of Accession, shall apply to the Channel Islands and the Isle of Man under the same...