In Lee & Bunter vs Commissioners for HMRC [2017] TC05757, the First Tier tribunal (FTT) found that a tax scheme which aimed to avoid capital gains tax (CGT) for an offshore trust by taking advantage of the double tax treaties failed: the trust was effectively managed in the UK and so resident here.

The appellants relied on the provisions of the Double Tax Convention (DTC) between the UK and Mauritius as having the effect of transferring the right to tax the gain where the trustees were located, in Mauritius. They then crystallized the gain in Mauritius, before moving the trust back to the UK in the same tax year. The “tie-breaker” clause in the DTC would ensure taxation of the gain in Mauritius (the “round the world” scheme).

HMRC contended, as they did in the case of Smallwood & Anor (a 2010 case involving the same planning technique) that because the key management decisions relating to the trust had been taken in the UK rather than Mauritius, the POEM was the UK, and this was where the gain should be taxed.

HMRC also introduced a new secondary argument, which was that the DTC treated the settlement only as resident in Mauritius, whereas HMRC were not taxing the Settlement but the Trustees, who were contended to be a “single and continuing body of persons constituting the UK resident trustees of the settlement”. The tribunal judge referred to this as the “different persons” argument.

The judges found that:

The appeals were dismissed.

Tthe judge did take the time to consider HMRC's “different persons” argument. He agreed with the appellants that the focus of the DTC is the category of the income or gain, and not the identity of the taxable person. As a consequence, there is nothing in the DTC which “dictates how the relevant Contracting State may tax the profits, or on whom the burden of tax is likely to fall” The purpose of the DTC was simply to establish the jurisdiction in which the gain should be taxed, not to establish how it will be taxed. HMRC’s contention in this part was therefore rejected.



Non-resident trusts

Lee & Bunter vs Commissioners for HMRC [2017] TC05757


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