Trevor Smallwood and Mary Caroline Smallwood Trustees of the Trevor Smallwood Trust Trevor Smallwood Settlor of the Trevor Smallwood Trust v Her Majesty's Revenue & Customs, SPC 00669
| Jurisdiction | UK Non-devolved |
| Judge | Dr John Avery Jones CBE,Dr A Nuala BRICE |
| Judgment Date | 19 February 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Trevor Smallwood and Mary Caroline Smallwood Trustees of the Trevor Smallwood Trust Trevor Smallwood Settlor of the Trevor Smallwood Trust |
| Reference | SPC 00669 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00669
CAPITAL GAINS TAX – double taxation relief – trust assets included shares which would realise a gain on disposal - UK settlor had power to appoint new trustees - tax planning scheme – new trustees in Mauritius appointed after which shares sold after which UK trustees appointed - all events took place in same tax year - whether trustees entitled to double taxation relief – whether trustees resident only in Mauritius – no - or also resident in the UK – yes - whether place of effective management of trust was Mauritius - no – or UK – yes - appeal dismissed – TCGA 1992 S 77(7); Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 SI 1981 No 1121
THE SPECIAL COMMISSIONERS
TREVOR SMALLWOOD AND MARY CAROLINE SMALLWOOD
TRUSTEES OF
THE TREVOR SMALLWOOD TRUST
Appellants
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents
TREVOR SMALLWOOD
SETTLOR OF
THE TREVOR SMALLWOOD TRUST
Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents
Special Commissioners: DR A N BRICE
DR J F AVERY JONES CBE
Kevin Prosser QC with Elizabeth Wilson, Counsel, instructed by KPMG Bristol for the Appellants
Timothy Brennan QC, with Akash Nawbatt, Counsel, instructed by the Solicitor of HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2008
DECISION The appeals 1. In 1989 Mr Trevor Smallwood (Mr Smallwood) settled property on trust for the benefit of himself and his family. Mr Smallwood and his wife, Mrs Mary Caroline Smallwood, (the Trustees) are the present trustees of the Trevor Smallwood Trust (the Trust). On 10 January 2001 the then trustees sold shares in FirstGroup plc (FirstGroup) giving rise to chargeable gains. On 26 January 2001 the then trustees sold shares in Billiton plc (Billiton) giving rise to chargeable gains. The Trustees claimed that they were entitled to double taxation relief because, at the dates of the disposals, the Trust was resident in Mauritius. 2. The Trustees appeal against a closure notice issued by the Commissioners of Her Majesty’s Revenue and Customs (the Revenue) on 31 January 2005. The closure notice amended the Trust’s tax return for the year ending on 5 April 2001 to include the full amount of a gain of £6,801,011 arising on the disposal of shares in FirstGroup, and of a gain of £17,378 arising on the disposal of shares in Billiton, and disallowed the claim for double taxation relief. The closure notice stated that, under the provisions of section 77(1) of the Taxation of Chargeable Gains Act 1992 (the 1992 Act), the Trustees were not chargeable on these gains and so the amendment would not result in any amendment to the tax payable by the Trustees for the year ending on 5 April 2001. 3. Mr Smallwood, as settlor, appeals against a closure notice issued by the Revenue on 31 January 2005. The closure notice amended Mr Smallwood’s return so as to show an amount of £6,818,390 as chargeable gains and tax of £2,727,356 as due.A summary of the legislation
4. We consider the legislation in detail later but a short summary is given here. Section 77(1) of the 1992 Act provides that, if a chargeable gain accrues to the trustees of a settlement from the disposal of settled property, and if the settlor has an interest in the settlement, the trustees are not chargeable to tax but the gains are treated as accruing to the settlor. As Mr Smallwood is also a beneficiary of the Trust he has an interest in it. Section 77(7) provides that the section does not apply unless the settlor is, and the trustees are, resident in the United Kingdom during any part of the year. Section 277 of the 1992 Act provides for relief from double taxation in relation to capital gains tax in cases where an Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the UK.
5. The Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 SI 1981 No. 1121 gives effect to the Convention set out in a Schedule to the Order (the Treaty). The Treaty is with the Government of Mauritius for the avoidance of double taxation with respect to taxes on income and chargeable gains. Article 13(4) provides:
“13(4) Capital gains from the alienation of any property … shall be taxable only in the Contracting State of which the alienator is a resident.”
6. Residence is defined in Article 4. Article 4(1) provides that the term “resident of a Contracting State” means any person who, under the law of that State, is liable to taxation therein by reason of stated criteria. Article 4(3) provides:
“(3) Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.”
A summary of the issue
7. The appeal relates to a tax avoidance scheme that is intended to work in the following way. A non-resident trust which has a gain on its assets appoints Mauritian trustees for part of a tax year and realises the gains during the period that the trust is resident in Mauritius. United Kingdom resident trustees are appointed before the end of the tax year. The provisions of section 77 of the 1992 Act potentially apply because the trustees are resident in the United Kingdom for part of the year within the meaning of section 77(7). Conversely section 86, which attributes gains of non-resident settlements to beneficiaries, does not apply if the trustees are United Kingdom resident for any part of the year. The Trustees argue that the Treaty prevents the United Kingdom from taxing the gains. There is a parallel appeal by Mr Smallwood because, as settlor, any gains will be chargeable on him under section 77(1)(c) if the Trustee’s argument does not succeed. 8. In this appeal a corporate trustee who was tax resident in Mauritius was appointed in December 2000. The corporate trustee disposed of shares in January 2001 and realised gains. In March 2001 Mr and Mrs Smallwood, who are resident in the United Kingdom, were appointed as Trustees. It was accepted that the Trustees were resident in the United Kingdom for part of the year of assessment ending on 5 April 2001...To continue reading
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