Inheritance Tax Bites on Jersey Resident's Generosity

A substantial portion of a benefactor’s generous legacy to good causes on the Island of Jersey will find its way into the pocket of HM Revenue and Customs (HMRC) following a controversial High Court ruling.

The woman, who died in 2007, had left the majority of her large estate on trust for the parish where she lived for the purpose of building homes for the elderly. Her will also provided for a gift over in default to an organisation providing hospice care. The trust was expressed to be subject to the law of Jersey.

The woman’s executors subsequently varied the terms of the trust by deed so that the hospice received a £10,000 gift and the remainder was devoted to building homes for the elderly. The law applicable to the trust was also changed from that of Jersey to that of England and Wales, although this did not have retrospective effect. The trust had later been registered as a UK charity.

The executors argued that the bequests should be treated as free from Inheritance Tax (IHT); however, that was hotly disputed by HMRC, who argued that they did not fall under the charitable exemptions contained within Section 23 of the Inheritance Tax Act 1984 and that, subject to final calculation, between £599,724 and £633,571 in IHT was therefore payable.

HMRC accepted that the trust’s objectives were exclusively charitable purposes recognised under UK law. However, in dismissing the executors’ appeal, the Court noted that the trust had, at its inception, been governed by Jersey law and had not therefore been ‘established in the UK’ as Section 23 required.

The executors had failed to put forward any good reason why Parliament should have intended that Section 23 should be interpreted so broadly as to permit IHT exemption for trusts governed by foreign law, even if their beneficiaries were exclusively charitable bodies established under UK law.