The High Court have reversed the Special Commissioners’ decision in the case of Smallwood and allowed the taxpayer’s appeal that capital gains made by his trustees in Mauritius were protected by the UK/Mauritius Double Taxation Agreement.
Mr Smallwood had moved his offshore trust to Mauritius in anticipation of making a gain that would be protected by the Double Taxation Agreement; after the gain was made, the trust became UK resident before the end of the tax year. The reasoning was that if the trust had been non resident the whole of the tax year, the gain made by the trustees would have been taxed on him under Section 86 TCGA 1992. By making the trust UK resident for part of the year, Mr Smallwood had rendered Section 86 inapplicable (it applies only to trusts that are not resident for the whole of the year) and the Double Taxation Agreement with Mauritius came into play.
The taxpayer failed before the Special Commissioners on the grounds that the trust should always have been treated as resident in the United Kingdom under the tiebreaker test in the Double Taxation Agreement. This judgment was disturbing because the Special Commissioners found that although the actions of the trustees in Mauritius were carried out correctly and all relevant activities were undertaken there, they felt that the influence of the settlor who had power to appoint new trustees and the guiding hands of senior advisers of KPMG in the United Kingdom meant that the trust was really UK resident.
This seemed like dynamite at the time – the influence of the settlor and the guidance of the advisers effectively usurping the position of the trustees. Fortunately the High Court did not agree and have concluded that although the trust later became resident in the United Kingdom, it was resident in Mauritius when the gain was made. The Double Taxation Agreement gave the right to tax capital gain to the state in which the trust was resident at the time of the disposal. The gain was therefore not chargeable to tax in the United Kingdom.
HMRC sought to invoke the tiebreaker provisions by claiming that the trust was resident in both territories by reason of the influence of the settlor and the advisers. The High Court held that at the time of the disposal, the trust was resident in Mauritius and there were no two jurisdictions vying for residence in that period, so no tiebreaker was necessary.
I do not suppose we have heard the last of this case.