Knights Developments – UK Upper Tribunal finds that profits from the sale of developed land constituted income from immovable property for Treaty purposes

The taxpayer (KDL) was a resident of the Isle of Man that used the development and marketing services of a related Isle of Man company to carry on a land development and trading business in the UK. Art. 6 of the UK–Isle of Man arrangement for the avoidance of double taxation (the “2018 DTA”) provided (along the OECD Model lines):

1. Income derived by a resident of a Territory from immovable property (including income from agriculture or forestry) situated in the other Territory may be taxed in that other Territory. …

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

Unlike the Canada–UK Treaty, Art. 6(3) did not expressly include profits from the alienation of immovable property.

KDL’s position was that Art. 6 was concerned only with income derived from the use or exploitation of land, and that this category of income was dealt with exhaustively by Art. 6(3), which referred to income derived for the purposes of Art. 6(1) and did not include profits from the sale of land that involved no continuing use or exploitation. Accordingly, its profits from its UK land sales fell outside Art. 6 and (as it did not have a UK permanent establishment) also were not captured by Art. 7.

The Tribunal rejected this submission, stating:

Our conclusion follows principally from the language and structure of Article 6 itself. The natural meaning of "income derived from immovable property" is sufficiently broad to encompass income which arises directly from the ownership, development and sale of the immovable property in question, and nothing in Article 6(3) requires Article 6(1) to be confined to income generated during a period of continuing ownership. We do not agree that the OECD Commentary, the reservation practice [in, e.g., the Canada treaty], or the reasoning in RBC establishes the narrower "use versus alienation" distinction for which the Appellant contends. … That interpretation is also consistent with the broader context and purpose of the arrangements and avoids what would otherwise be a striking exclusion from source-state taxation of a particular category of income derived from United Kingdom immovable property.

In obiter it indicated that if, contrary to this conclusion, Art. 6(1) did not itself extend to the profits in issue and therefore Art. 6(3) assumed determinative importance, KDL’s activities nonetheless would fall within Art. 6. It stated:

The Appellant's analysis places undue emphasis upon the final act of sale. …

A property development trade involves substantially more than the passive holding of land pending disposal. The land is employed, altered, improved and commercially deployed in order to generate profit. In ordinary language, that constitutes a form of use.

The Tribunal also went on to state, obiter, that, contrary to the HMRC submission, Art. 13 of the 2018 DTA dealt only with capital gains (notwithstanding that it referred instead to “gains”) having regard to the overall structure of the 2018 DTA.

Neal Armstrong. Summary of Knights Developments Ltd v Revenue and Customs [2026] UKUT 329 under Treaties – Income Tax Conventions – Art. 6.