First-tier Tribunal considers taxing rights under the UK-Portugal Double Tax Convention

The First-tier Tribunal (“FTT”) in Trevor John Masters v HMRC [2025] UKFTT 00967 (TC) examined whether withdrawals from a Self-Invested Personal Pension (“SIPP”) were “paid in consideration of past employment” under the UK - Portugal Double Tax Convention (the “DTC”). In allowing the taxpayer’s appeal, the FTT decided that the withdrawals were “paid in consideration of past employment” within Article 17 of the DTC and, as Mr Masters was resident in Portugal at the relevant time, the DTC allocates the taxation rights over them to Portugal. The decision provides useful commentary on the interpretation of a DTC, including consideration of the OECD commentary and may be of interest to practitioners in this area.

Facts and background

Mr Masters was a member of a defined benefit occupational pension scheme (the “Pension Scheme”) between March 1983 to November 2015 as a company employee.  All the Pension Scheme benefits would be paid in consideration of past employment. In April 2016, Mr Masters arranged for his entitlement in the Pension Scheme to be transferred as cash equivalent to a newly created SIPP (the “TJM SIPP”).

Mr Masters left the UK in March 2019 and was resident in Portugal for the 2019/20 tax year with Non-Habitual Resident (“NHR”) status. Prior to 2019/20 Mr Masters was UK tax resident. At the time, NHR’s benefitted from exemption of foreign source pension income from taxation in Portugal if taxed by the source state or not deemed to be obtained in Portugal. During the 2019/20 tax year, Mr Masters withdrew funds from the TJM SIPP (the “SIPP Withdrawals”) which the Portuguese authorities did not tax on the basis of the NHR scheme.

The SIPP Withdrawals were subject to the deduction of UK income tax at source, which is the subject of this appeal. Subsequently, Mr Masters requested a no tax (“NT”) code from HMRC. This was rejected by HMRC. Mr Masters submitted his UK self-assessment tax return for the 2019/20 tax year, claiming relief for the tax deducted. Mr Masters sought to rely on the DTC to treat the SIPP Withdrawals as taxable in Portugal only, allowing him to claim the relief and obtain a NT code.

Article 17 of the DTC provides that pensions paid “in consideration of past employment to a resident of a Contracting State” will be taxable only in that State. Article 20 of the DTC provides a similar provision for items of income that are not expressly mentioned in the DTC provided that the resident is “subject to tax” in that State.

HMRC enquired into the request for a NT code and the 2019/20 tax return. HMRC issued separate closure notices in May 2021 and review conclusion letters in November 2022, rejecting Mr Masters’ claims for an NT code and tax relief on the basis that:

1. Article 17 of the DTC does not apply to the SIPP Withdrawals because they are not “paid in consideration of past employment”; and
2. Pursuant to Article 20 of the DTC, the SIPP Withdrawals are taxable in the UK because they are not “subject to tax” in Portugal.

HMRC argued that the relevant causal connection between Mr Masters’ employment and the SIPP Withdrawals was broken so that they did not meet the condition of being “paid in consideration of past employment”.

Decision

The FTT allowed Mr Masters’ appeal and decided that the SIPP Withdrawals were “paid in consideration of past employment” thus Article 17 applied. The FTT considered that the relevant causal connection was not broken because Mr Masters’ had transferred his entitlement in the Pension Scheme to the TJM SIPP directly. None of the funds had become his property until the SIPP Withdrawals were made.

The FTT contrasts this with the situation where an employee receives a salary from their employer and then pays some of that salary into a SIPP. Here, the causal connection would be broken because the salary had moved into the hands of the employee before passing into the SIPP. Other facts in the case strengthened the relevant causal connection, including the proportionately short period of time that Mr Masters’ entitlement had been held in the TJM SIPP compared to the Pension Scheme. Although it was not necessary for the tribunal to consider Article 20, in the alternative the FTT considered that the “subject to tax” condition required actual and effective taxation. As the SIPP Withdrawals were exempt from Portuguese tax they were not actually taxed in Portugal, so Article 20 would not apply to prevent the UK from taxing the SIPP Withdrawals.

Comment

This case will be of particular interest to individual taxpayers with large entitlements held under a SIPP and who may be seeking the most tax-efficient retirement destinations. The FTT confirmed that SIPPs may fall under the provision of Article 17, reducing HMRC’s ability to apply UK income tax to such pensions. However, caution should be advised, as the decision also suggests that a case-by-case analysis will be implemented for any SIPPs situated outside the UK. As taxpayers will be aware, the application of tax treaties and issues of tax residency are highly fact dependent. Similarly, it is key to ensure that detailed records are held to support residence and treaty claims, particularly where matters relate to years or decades earlier which are important for determining the issues.

For further information please email the authors or your usual CMS contact.

This article was prepared with the assistance of Antonio Burcus, a trainee in CMS London.