Interest incurred on loans made to two interest in possession settlements in the Isle of Man, where the loans were ultimately used in a trade carried on by a partnership between the two settlements, was not deductible from partnership trading profits. 

The appellants, UK resident property developers, used a tax avoidance scheme. In April 2005, each appellant created a settlement in the Isle of Man (IOM), the trustees of which were IOM companies. The trustees entered into a partnership in the IOM (‘Redwood’). Each partner was entitled on behalf of its settlement to 50% of the profits of Redwood. In May 2005, the trustees entered into loan agreements with a third-party lender. The monies advanced under each loan agreement were used by Redwood towards purchasing a property. 

The appellants initially contended that they were not liable to