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The Routier case and why it matters

6 January 2015

A recent High Court decision has been published which demonstrates the care required when dealing with gifts to non-UK charitable entities. That case, Routier v HMRC, related to the availability of the inheritance tax exemption for gifts to charities.  Generally, this exemption is only available where the charitable entity has been established either in the UK or, following a recent change in the law, in another EU country. The late Mrs Coulter, a Jersey domiciliary, made a gift in her will of UK assets to a Jersey trust for exclusively charitable purposes. Because the trust was governed by Jersey law and resident in Jersey, it was not a “charity” for UK tax purposes, as Jersey is not part of the UK.

Ensuring that Mrs Coulter’s gift qualified for the inheritance tax exemption would have been straightforward:  the exemption would have applied had Mrs Coulter’s will appointed UK-resident trustees of an English law charitable trust. Even were this opportunity missed, a post-death variation could have rectified the position. Unfortunately, an attempt at a post-death variation in this case was bungled. 

Notwithstanding this, there were still good arguments that the inheritance tax exemption should apply. Unfortunately HMRC disagreed, as did the High Court. Unless the case is taken to the Court of Appeal, the result will be an inheritance tax liability which, with the benefit of good advice, would never have arisen.

Dominic Lawrance and James Austen of Charles Russell Speechlys LLP have written an article for Trusts & Trustees explaining why (in their view) the exemption should have been granted in Routier. As discussed in the article, there are strong grounds for concluding that HMRC and the High Court have construed the exemption too narrowly, having been unduly influenced by a case decided in the 1950’s.  Furthermore, it seems likely that EU law effectively overrides the inheritance tax legislation in this situation, as it prohibits discrimination against transfers of capital to “third countries” – including gifts to Jersey-resident trusts.

The article can be viewed here.

It is hoped that the High Court decision will be appealed by Mrs Coulter’s executors.  The case raises important issues and any further litigation will be watched with interest by practitioners.  However, perhaps the main point of the case for non-specialists is the need to take expert advice regarding charitable gifts, especially where there is any kind of international dimension.  This point applies not only to gifts made by will, as in Routier, but also to lifetime gifts (which can trigger inheritance tax if the charity exemption is not available) and appointments out of existing trusts.

This is a highly technical area and, as the Routier case demonstrates, HMRC will not hesitate to take technical points, seemingly without any embarrassment at denying tax relief for gifts for charitable purposes.

The simple message is that if you want to ensure that a gift to a foreign charitable entity is tax-efficient, expert advice is a “must”.