Smallwood v Revenue and Customs

Under a double-taxation treaty, successive periods of residence must not be converted into simultaneous residence for the whole tax year unless the treaty or domestic legislation requires that result. For capital gains within Article 13(4), the relevant residence is that of the alienator when the disposal occurs. If only one state has residence-based taxing rights at that time, the Article 4 tie-breaker is not engaged. A later change of residence does not retrospectively create competing residence during the earlier disposal period.

The taxpayers appealed against the Special Commissioners’ dismissal of their appeals concerning amendments to tax returns for 2000–2001. Trustees of the settlement transferred substantial shareholdings from a Jersey trustee to a Mauritius trustee, which sold the shares before the trustees were replaced by UK-resident trustees. The arrangement was intended to avoid a charge on the settlor under the Taxation of Capital Gains Act 1992.

The central issue was whether the Mauritius trustee was resident only in Mauritius when the disposal occurred, or whether the subsequent UK trusteeship created dual residence for the relevant period, requiring application of the treaty tie-breaker and its place of effective management test.

1. The appeal was allowed. The Special Commissioners’ analysis in paragraph 107, which treated the trustees as having simultaneous Mauritius and UK residence throughout the relevant period, was unsupported by the treaty or domestic legislation.

2. The relevant domestic provisions, including sections 77 and 86 of the Taxation of Capital Gains Act 1992, could impose tax by reference to residence during part of a tax year, but they did not deem residence to exist during periods when the trustees were not actually resident. The correct analysis was one of successive periods of Jersey, Mauritius and UK residence.

3. Article 13(4) allocated the right to tax the gains to the state in which the alienator was resident at the time of the disposal. The trustee was resident in Mauritius at that time. Mauritius therefore had the treaty right to tax the gains, and the UK did not.

4. There was no concurrent residence at the relevant time. Consequently, there was no tie for Article 4 to resolve. The subsequent acquisition of UK residence did not retrospectively create a UK residence during the Mauritius period.

5. The place of effective management issue under Article 4(3) therefore did not arise and was not decided. The appeal succeeded on the residence and allocation-of-taxing-rights analysis.

• High Court (Chancery Division): allowed the taxpayers’ appeal from the Special Commissioners’ decision released on 19 February 2008.