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Inheritance Tax Charity Exemption Does Not Extend to Overseas Trusts

In a decision of importance to charities and to any British citizen who is domiciled abroad, but who has assets in the UK, the Court of Appeal has ruled that £600,000 in Inheritance Tax (IHT) was properly charged on a woman’s bequest of over £1.8 million for the benefit of elderly Jersey residents.

The woman was domiciled in Jersey and, at the date of her death, held assets in the UK valued at £1,818,000. By her will, she left those assets on trust for the purpose of constructing homes for old people living in a particular parish on the island. If that gift failed for any reason, the trust’s capital was to be applied for the assistance of a Jersey-based hospice care organisation.

The executors of the woman’s estate argued that no IHT was payable on the transfer of the assets’ value in that they were held in trust for charitable purposes only, within the meaning of section 23 of the Inheritance Tax Act 1984 (section 23). That was disputed by HM Revenue and Customs (HMRC) whose interpretation of the law was upheld by the High Court.

In dismissing the executors’ challenge to that ruling, the Court of Appeal noted that the trust established by the woman’s will was subject to the laws of Jersey, which is not part of the UK, and was administered by Jersey trustees. The trust was not governed by the law of any part of the UK and, had Parliament intended the exemption from IHT to extend to overseas trusts, it would have said so in terms.

The Court would hear further argument on the executors’ alternative case that HMRC’s interpretation of section 23 constituted an unlawful restriction on the free movement of capital between EU member states and third countries within the meaning of Article 63 of the Treaty on the Functioning of the European Union.