Gifts to charities – free from tax?

The testatrix, Mrs. Coulter, was domiciled in Jersey and died there. Her estate, at the date of her death, included assets in the United Kingdom with a probate value of £1,818,000.

By her will, Mrs Coulter left her residuary estate, which included the UK assets, on trust for the purpose of constructing homes for elderly residents of a parish in Jersey (the Coulter Trust); or, in default, to assist with the capital expenditure required by an organisation called Jersey Hospice care.

HM Revenue and Customs (HMRC) determined that the appellants, as executors, were liable for inheritance tax of around £600,000. The appellants appealed on two issues: the first whether the residuary estate of Mrs Coulter was ‘given to charities’ for the purposes of s.23 of the IHTA 1984; and secondly, they advanced an argument that should s.23 be construed in the manner contended by HMRC, as detailed below, this would be an unlawful restriction on the free movement of capital between Member States and third countries and in breach of EU law.

S.23 finds that transfers of value, in this case the residuary estate under Mrs Coulter’s will, are exempt from IHT if the property becomes the property of charities or is held on trust for charitable purposes only. The IHTA 1984 expresses that a ‘charity’ has the same meaning as in the Income Tax Acts, which under s.989 of the Income Tax Act 2007 defines a charity as ‘a body of persons or trust established for charitable purposes only’.

The Court relied on Camille and Henry Dreyfus Foundation Inc v IRC [1956] AC 39 in which the House of Lords held that a ‘trust established for charitable purposes only’ contains an implicit limitation. To be eligible for IHT exemption, the trust in question must be governed by the law of some part of the UK and subject to the jurisdiction of the courts of the UK.

The Coulter Trust was established under, and governed by, Jersey law. It was therefore not a ‘charity’ for the purposes of the legislation, as s.23 is to be read as requiring the charity to be established in the UK, and therefore, the will did not effect a transfer to ‘a trust established for charitable purposes only’.

The implications

This ruling sets out that the legislation cannot be read in a way which allows exemptions from IHT in relation to gifts to non-UK charities.

Donors should therefore be advised of this restriction when choosing the charities they wish to benefit under their will; if they want the benefit of the IHT exemption, the charity they are benefitting must be established under the law of some part of the UK.

This decision does raise questions in relation to gifts to charities of a transnational size, which could be argued to not be domiciled in any one country. It would appear, for now, that gifts to such charities will not be exempt for IHT purposes, even if the donor is domiciled and their assets are based in the UK.

Further questions can be raised in relation to the unlawful restriction of free movement of capital argument and whether Jersey is to be treated as a ‘third country’ for the purposes of EU law. However, neither party provided sufficient evidence to enable the Court to give judgment on this issue.

Both parties have been invited to propose directions for that purpose.

For more information, please contact Alex Elphinston.

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