Trusts – Capital gains tax – Double taxation treaties - Mauritius

(1) Trevor Smallwood and Mary Caroline Smallwood (trustees of the Trevor Smallwood Trust) (2) Trevor Smallwood v Revenue & Customs Commissioners: Ch D (Mr Justice Mann): 8 April 2009

The appellants (S and his wife) appealed against a decision ([2008] STC (SCD) 629) dismissing their appeals against amendments to their tax returns for the year 2000/01 so as to include chargeable gains of more than £6m arising on a disposal of assets by trustees.

S had settled a number of shares on trust for the benefit of himself and his family. The settlement gave him the power to appoint the trustees. He remained a beneficiary of the trust. The trustee was a Jersey company (L). The shares had increased significantly in value and it was decided to sell them. A sale by L would have led to a charge on S, as a resident settlor having a beneficial interest under the trust, pursuant to section 86 of the Taxation of Chargeable Gains Act 1992. A scheme was devised in order to avoid such a charge. A Mauritius company (P) was appointed to be the new trustee. P then sold the shares. In the same tax year P was replaced as trustee by S and his wife. S’s contention was that section 86 did not apply because the trustees were resident in the UK for some part of the relevant year, and that the chargeable gains which would otherwise fall within section 77(1)(b) were only taxable in Mauritius, where P was resident, because of the effect of the double taxation arrangements with Mauritius contained in the convention scheduled to the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981. The special commissioners considered that the effect of article 4 of the convention was such that residence by the trustee in one jurisdiction for part of the year and in another for another part had the effect of potentially creating a residence in both jurisdictions for the whole of the year; that potential conflict was to be resolved by the ‘tie-breaker’ provision in article 4(1); applying the tie-breaker, the place of effective management of the trust remained in the UK even when P was trustee. Therefore the gain was taxable in the UK and appeals by S and his wife as trustees and S as settlor were dismissed. The appellants contended that the special commissioners erred in concluding that, on the facts, there was a dual residence at any time; the effect of article 13(4) of the convention was to allocate the right to tax the capital gains to the country in which the trustee was resident for treaty purposes at the time of the share sale. The respondent commissioners argued that article 13(4) was intended to resolve conflicts between taxation rights based on situs and those based on residence; if there were successive periods of residence, then the conflict was resolved by applying article 24; since there was no Mauritius tax to deduct from the UK tax, the UK tax was recoverable in full.

Held: (1) There was no justification in the wording of the convention or the UK tax legislation for the special commissioners’ interpretation of article 4 creating an artificial deeming concept of dual residence.

(2) The appellants’ interpretation of article 13(4) was to be preferred. The convention wording did not support the respondent commissioners’ analysis. The wording of article 13(4), ‘taxable only in the contracting state of which the alienator is resident’, suggested an attempt to find one state only, and not merely a basis of taxation. That view was supported by a review of the rest of the treaty, which supported the appellants’ view that article 13(4) pointed to a single jurisdiction in which tax could be charged, namely the state of residence. In order to make that workable, one had to find a date at which residence had to be judged. There was no other realistic candidate for that point of time other than the date the gain arose or the date of the disposition, which in the instant case was probably the same point of time. If there was competition between both states in relation to that point of time, then the tie-breaker applied to produce a single state in respect of which residence, in the sense used in article 4, existed. Article 24 did not really work at all on the respondent commissioners’ analysis.

(3) The special commissioners erred in creating a simultaneous residence for the trustees, spanning the Mauritian period. The correct analysis was that there were three periods of successive residence in the relevant UK tax year: Jersey, Mauritius and then the UK. Article 13(4) gave the right to tax capital gains to the state in which there was residence at the time of the disposition. That state was, at that date, Mauritius. Since there were no two jurisdictions vying for a claim of residence in that period, there was no tie for article 4 to break. Accordingly, Mauritius had the right to tax and the UK did not.

(4) It was not necessary to decide the place of effective management issue.

Appeal allowed.

K Prosser QC, E Wilson (instructed by Gregory Rowcliffe Milners) for the appellant; T Brennan QC, A Nawbatt (instructed by the in-house solicitor) for the respondents.