UT (Tax & Chancery) UT/000086, 87, 89/2022 - [2024] UKUT 00058 (TCC)

The issue arises in the context of three separate family trusts. One family trust was established by Mr Haworth as settlor in 1987 (“the GRH Trust”). Two family trusts were established by Mr Lenagan as settlor in 1991 (“the IFL Trust” and the “S & A Trust”).

At the beginning of tax year 2000-01, the trustees of Mr Haworth’s GRH Trust and the separate trustees of Mr Lenagan’s IFL Trust and S & A Trust were resident in Jersey. The trusts had been established for many years. The GRH Trust held shares in Teleware Plc (“Teleware”). The IFL Trust and the S & A Trust held shares in Workplace Systems Limited (“Workplace”). A proposal was being considered whereby the businesses of Teleware and Workplace would be merged as TeleWork Group Plc (“TeleWork”) and floated on the London Stock Exchange. The purpose of the tax planning was to avoid capital gains tax on disposals of shares by the family trusts in connection with the flotation.

By way of brief summary, if the merger and flotation went ahead the scheme was intended to operate by way of the following steps, each taking place in the tax year 2000-01:

There were of course various decisions to be taken in connection with these steps, in particular in relation to the merger, the flotation of TeleWork and the disposal by the family trusts of shares in TeleWork. There was also the possibility of a disposal of the shares without a merger and flotation. We consider the FTT’s findings in relation to the decision-making in more detail below.

There was no dispute as to the legal framework which underpinned the scheme and we can describe it quite briefly. The following description is of the relevant provisions in 2000-2001. The provisions were subsequently amended to prevent avoidance of tax using the round the world scheme.

At all material times, the effect of section 2 Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) was that chargeable gains accruing to the trustees of a settlement who were UK resident for capital gains tax (“CGT”) purposes during any part of a tax year were chargeable to tax on the trustees directly in that year:

Section 69 TCGA 1992 provided that the trustees of a settlement were at all material times treated as a single continuous person distinct from the persons who were the trustees from time to time. It also defined the place of residence of trustees for the purposes of CGT:

Section 77 TCGA 1992 had the effect that chargeable gains accruing to the trustees of a settlement in which a settlor had an interest in the settlement were treated as accruing to the settlor. It applied where the settlor and the trustees were UK resident for CGT purposes during any part of the tax year:

Where tax was chargeable on a settlor pursuant to section 77, the settlor had a right of recovery against the trustees pursuant to section 78.

In tax year 2000-01, Mr Haworth as settlor of the GRH Trust and Mr Lenagan as settlor of the IFL Trust were each deemed to have an interest in their respective settlements. Hence, chargeable gains realised by the trustees of those settlements would in principle be treated as accruing to Mr Haworth and Mr Lenagan pursuant to section 77. Mr Lenagan did not have an interest in the S & A Trust for the purposes of section 77. Hence any chargeable gains realised by the trustees of that settlement would in principle be chargeable on the trustees directly pursuant to section 2.

In the events which happened, it is common ground that during tax year 2000-01, the ‘general administration’ of the trusts was located in Jersey for the period 6April 2000 to 26June 2000 (in the case of the GRH Trust) and 6April 2000 to 30June 2000 (in the case of the IFL Trust and the S & A Trust); in Mauritius for the period 26June 2000 to 24October 2000 (in the case of the GRH Trust) and 30June 2000 to 24 October 2000 (in the case of the IFL Trust and the S & A Trust); and in the UK for the period 24October 2000 to 5April 2001. Each trust was therefore UK resident and non-UK resident for part of the tax year. Subject to any double taxation relief, Mr Haworth and Mr Lenagan would be taxable on chargeable gains of the GRH Trust and the IFL trust respectively, with a right of recovery against the trustees. Chargeable gains realised by the S & A Trust would be taxable directly on the trustees of that trust.

The effect of double taxation relief and the mechanics of the scheme as it operated in Smallwood were succinctly summarised by Lady Rose JSC in R (otao Haworth) v HM Revenue & Customs [2021] UKSC 25 at [16] and [17] which was Mr Haworth’s judicial review claim:

Section 277 TCGA 1992 and Part XVIII Income and Corporation Taxes Act 1988 together provided that a taxpayer was entitled to relief from UK CGT in circumstances where relief or exemption from tax was available to the taxpayer under the terms of a relevant double taxation treaty agreed between the UK and another state or territory.

At all material times the provisions of the Double Taxation Relief (Taxes on Income) Mauritius Order 1981/1121 gave effect in UK law to the UK/Mauritius Treaty (“the Treaty”). The Treaty applied to CGT as well as to income tax. It applied to persons who were residents of one or both of the Contracting States.

Article 3 of the Treaty contained various relevant definitions as follows:

Article 13 of the Treaty concerned the taxation of capital gains. Article 13(4) applied to the disposal of the shares held by the family trusts. It provided as follows:

Article 4 of the Treaty defined a “resident” of each Contracting State for the purposes of the Treaty. In circumstances where a person was a resident of both Contracting States, the person was deemed to be a resident of the Contracting State in which its POEM was situated:

It is now common ground that the trustees of each of the three settlements were resident in both the UK and Mauritius during tax year 2000-01 pursuant to the domestic laws of both the UK and Mauritius. Hence, the availability of exemption from UK CGT pursuant to Article 13 of the Treaty turned on the question of whether, for the purposes of Article 4(3) of the Treaty, the POEM of the settlements was in the UK or Mauritius in the relevant period. We will need to consider what is the relevant period over which the POEM of a trust is to be determined in due course. If the POEM was the UK, gains realised by the trustees would be chargeable to CGT. If it was Mauritius, gains realised by the trustees would be taxable only in Mauritius. Mauritius at this time chose not to tax capital gains which meant that the gains realised by the trustees would be free of tax if the scheme was implemented effectively.