The taxpayer, Knights Developments Limited (KDL), was resident in the Isle of Man and carried on a trade of acquiring, developing and selling UK residential property. The parties agreed that KDL’s profits from its development of UK property were trading profits and therefore income in nature under UK domestic law. It was also common ground that KDL did not have a UK permanent establishment (PE), so that, unless those trading profits fell within Article 6 or Article 13, they were protected from UK taxation by the UK-Isle of Man DTT.
Article 6: limited to income from the use or exploitation of immovable property?
In rejecting the taxpayer’s argument that Article 6 was limited to the income (for example, rental income) from the use, or exploitation, of immovable property, and did not extend to profits from the disposal of immovable property, the Tribunal reasoned that:
- Article 6(1)’s language is broad and unqualified, encompassing income arising from rights inherent in ownership of immovable property. That Article’s nexus requirement, for income to derive from immovable property, does not limit it to income which arises during the taxpayer’s ownership of the property;
- Article 6(3) does not provide an exhaustive definition of income falling within Article 6(1), limiting it to income derived from the direct use, letting or use in any other form of immovable property, but is only clarificatory. Even if the Tribunal were wrong on this point, it considered that property development was ‘use in any other form’ within Article 6(3); and
- Article 6(4) is more consistent with HMRC’s interpretation of Article 6(1).
In reaching its conclusion, the Tribunal departed from views expressed by leading commentators that Article 6 does not apply to income from the sale of immovable property and distinguished Supreme Court comments in Royal Bank of Canada v HMRC [2025] UKSC 2 (Royal Bank of Canada) because those comments (about the need for a continuing interest in land) addressed a different question to the one it needed to determine.
Article 13: Do gains from alienation of immovable property include trading profits from the disposal of that property?
In obiter comments, the Tribunal rejected HMRC's alternative argument that trading profits arising on the disposal of immovable property could fall within Article 13.
Although the Tribunal acknowledged the force of HMRC’s textual argument that the term ‘gains’, rather than capital gains, was used in Article 13, the UK-Isle of Man DTT (including Article 7(4)) consistently distinguishes between income and capital gains. That context, along with comments in decisions of both the Court of Appeal and the Supreme Court in Royal Bank of Canada, required the term ‘gains’ in Article 13 to be limited to the role traditionally performed by the capital gains article in OECD-model treaties.
