Upper Tribunal takes a broad approach to UK taxing rights over property development profits | Global law firm
The Upper Tribunal has held that the UK–Isle of Man Double Tax Arrangement permits the UK to tax the trading profits of a non-UK resident developer from the acquisition, development and sale of UK land, despite the absence of a UK permanent establishment.
In 2016, the UK’s transactions in land rules were amended to bring within the charge to corporation tax profits earned by non-UK resident companies from dealing in or developing UK land, without requiring the company to carry on a trade through a UK permanent establishment. Around the same time, the UK–Isle of Man Double Tax Arrangement (DTA) was also amended to confer taxing rights over income “derived from immovable property” and gains “from the alienation of immovable property” on the territory in which the relevant real estate is situated. It however has remained an open question of how and to what extent non-UK developers of UK land can be taxed on their trading profits.
In Knights Development Limited, (which is seen as an important test case) the Upper Tribunal held that the trading profits of an Isle of Man-resident company, Knights Development Limited (KDL) which included profits from the disposals of UK property, were taxable in the UK under Article 6 of the DTA as income derived from immovable property. It also expressed the view that, in the context of the DTA, those trading profits did not constitute “gains” merely because they arose on a disposal and would not therefore have been taxable under Article 13.
By adopting a broad reading of the DTA’s immovable property article, the decision will be of interest not only to non-UK resident developers but also to those considering treaty provisions more generally and the need to interpret them as part of a coherent whole. KDL is the lead appellant in a series of appeals that HMRC estimates could affect up to £1 billion of historic claims and £230 million in annual future revenue.
The dispute
KDL was an Isle of Man-resident property developer with no UK permanent establishment. It was accepted therefore that the DTA’s business profits article therefore did not apply.
KDL and HMRC agreed that the profits from KDL’s acquisition, development and sale of UK land were trading profits, and therefore income rather than capital in nature. They also agreed that the UK’s transactions in land rules brought those profits within the charge to UK corporation tax as a matter of domestic law. The appeal therefore turned on whether the DTA allocated taxing rights over the profits to the UK.
HMRC’s primary case was that the UK had taxing rights because the profits were income derived from immovable property situated in the UK within Article 6. In the alternative, it argued that the profits fell within Article 13 as “gains” from the alienation of UK immovable property.
KDL contended that Article 6 applied only to income arising while property was retained (for example, rental receipts), not to profits realised on disposal. In support of that interpretation, KDL pointed to the UK–Canada double tax treaty, under which Canada expressly reserves the right to bring profits from the disposal of immovable property within Article 6(1). KDL argued that, had the parties intended the UK–Isle of Man DTA to have the same effect, they could have included an equivalent reservation.
KDL further argued that Article 13, the provision dealing with taxing rights in relation to gains and headed “capital gains”, was inapplicable because “gains” in this context, was confined to gains of a capital nature and did not include KDL’s trading profits albeit that they arose from disposals.
Article 6: A broad source-state taxing right?
The Upper Tribunal rejected KDL’s restrictive interpretation and held that its profits from the disposal of UK land were taxable in the UK. Article 6(1), which addresses income from immovable property, was framed in broad terms and was not confined to rent or other returns generated while land is retained. In reaching that conclusion, the tribunal treated Article 6(3)—which provides that Article 6(1) applies to direct use, letting and “use in any other form”—as clarificatory rather than exhaustive: it illustrates the provision’s reach without defining its outer limits. Even if Article 6(3) were exhaustive, the tribunal considered that KDL’s development activities would amount to “use in any other form” and would therefore fall within Article 6(1). Article 6(4), which provides that Articles 6(1) and 6(3) “shall also apply to the income from immovable property of an enterprise”, reinforced that conclusion in the tribunal’s view by confirming that income from immovable property falls within Article 6 even where it forms part of an enterprise’s trading profits.
Article 13: does “gains” include trading profits from a disposal?
Having disposed of the appeal under Article 6, the tribunal did not need to determine HMRC’s alternative case under Article 13. It nevertheless addressed the point because of its likely significance in any appeal. HMRC submitted that the term “gains” should take its UK domestic-law meaning and, on that basis, be capable of including profits taxed as income. The tribunal accepted that the argument had some force when Article 13 was viewed in isolation but rejected it when the DTA was read as a coherent whole.
In the tribunal’s view, Article 13 performs the conventional function of a capital gains provision. The DTA repeatedly distinguishes income from capital gains, and its provisions should be construed as components of a coherent allocation of taxing rights. Against that background, “gains” in Article 13 did not extend to trading profits merely because they arose on a disposal.
Treaty interpretation in the spotlight
The tribunal emphasised that treaty provisions should be interpreted by reference to the treaty as a whole, rather than in isolation, and on the basis that they form part of a coherent scheme.
Its approach also makes clear that, although OECD Commentary, academic writing and foreign case law may illuminate the meaning of OECD-based treaties, such materials are persuasive rather than authoritative. Their weight depends on how closely their reasoning engages with the particular wording and issue before the court. The leading commentaries, Vogel and Baker, distinguished between the “use” and “alienation” of property. However, because they did not address the particular position of a developer whose business consists of acquiring, developing and selling land, the tribunal considered that distinction insufficient to displace its conclusion.
The tribunal also distinguished the Supreme Court’s decision in Royal Bank of Canada [2025] (in which we acted for RBC in its successful appeal) on the basis that the case concerned receipts arising under contractual rights where the taxpayer had never held a proprietary or concessionary interest in the underlying property.
The decision will be of particular significance to property developers resident in Jersey or Guernsey, whose respective DTAs with the UK contain similar provisions. Its implications may, however, extend further. Non-UK resident developers should therefore consider revisiting cross-border development structures and reassessing treaty positions predicated on the absence of a UK permanent establishment. More broadly, the judgment offers useful guidance to taxpayers operating across borders on the interpretation of treaty provisions. The tribunal made clear that the articles of a DTA must be construed as elements of a coherent whole rather than in isolation. It also indicated that the persuasive weight accorded to OECD materials, academic commentary and foreign judgments will depend on the extent to which their reasoning engages with the particular language and issue before the court.
Given the wide interpretation of Article 6 adopted by the tribunal, the sums at stake and the number of related appeals, it is likely that this decision will be taken further to the UK higher courts. Any appeal will be closely watched, both for the light it may shed on the boundary between property income, business profits and capital gains in this context, and for its broader implications for treaty-based claims involving UK land.
