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Bulldozer, home construction | AccountingWEB | Garden sale to a developer sprouts PPR complications
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Garden sale to developer sprouts PPR complications

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A taxpayer successfully claimed private residence relief on the sale of part of a garden despite the construction of two houses having already started on it.

17th May 2024
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Andrew Nunn sold part of his garden to a developer, Michael Daly (acting on behalf of his company, M.A. Daly Building Contractors Ltd) for the construction of two houses.

Although the sale didn't formally complete until 7 September 2016, Nunn and Daly entered into an agreement allowing Daly to commence work on the development while the sale was going through.

The reason for this was to allow the company to make progress during the good weather. The agreement took the form of a letter, signed by Nunn and Daly and dated 2 June 2016.

Nunn claimed Private Residence Relief (PRR) on the disposal under section 222 TCGA 1992 on the basis that the land formed part of the garden of his main residence. The dispute at the heart of the appeal concerned whether the area of land retained the character of garden at the time of disposal, or whether HMRC was correct to disallow PRR as building works had commenced before completion of the sale.

Digging into the details

Nunn purchased the Oxfordshire property in 1995 and lived there ever since. That the property was his main residence for the purposes of PRR was not disputed. S22 provides relief from CGT on the disposal of a private residence or "land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area".

By the time the sale formally completed on 7 September, a significant amount of building work had taken place. The foundations of the houses had been poured and brick walls were sufficiently high that scaffolding had been erected for construction of the second storey. HMRC disallowed PRR on the basis that Nunn was no longer benefitting from his own occupation and enjoyment of the land and charged CGT of £72,633.80 on the disposal.

The first tier tribunal (FTT) decided that the relevant date on which S222 should be considered was the disposal date. However the judge did not necessarily agree with HMRC that the 'disposal date' meant the date of completion.

Disposal date plants seeds of doubt

Potential ambiguity over the disposal date arises because s28 TCGA sets out a deeming rule for the time of disposal:

“...where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).”

Therefore, if the 2 June letter constituted an unconditional contract for the sale of the land but the transfer of the land was not completed until 7 September then, applying s 28, the disposal date for TCGA purposes would be the earlier date of 2 June.

Leaning on the decisions in Lee v HMRC and Underwood v HMRC, the tax authority insisted that the date of disposal should be the date of the 'disposal of the entire beneficial interest in the asset', ie 7 September 2016.

Muddy timeline

The FTT considered that if it could be shown that a disposal had taken place before the date of completion, S222 would apply to the earlier disposal. The matter to be decided was therefore whether the 2 June letter constituted a contract for disposal. If it did not, the taxpayer put forward that the letter gave rise either to a constructive trust or an appropriation of the land to trading stock. Any of these three options would confirm 2 June as the disposal date so that PRR could apply.

The judge decided that the letter was sufficiently vague so as not to constitute a contract for disposal.

On whether it gave rise to a common intention constructive trust, the wording of the 2 June letter and various extracts from other correspondence was scrutinised. Ultimately the FTT took the view that there was no indication that the land had changed hands, nor of an intention to immediately transfer the land. Although referring to it as an "ingenious submission", the judge decided that the evidence lacked sufficient clarity and dismissed the constructive trust argument.

The root of the matter

The only viable option left for Nunn was to invoke s 161 TCGA and persuade the FTT that the land had been appropriated to trading stock on 2 June, prior to its eventual disposal.

The judge considered the case of Taylor v Good to be most closely aligned with the facts in this case, inferring from the Court of Appeal judgment that "steps to make 'mere enhancements' such as the seeking of planning permission will not be sufficient to permit a finding of a supervening trade. However, absorption of the land into a pre-existing trade could permit such a finding, as could activities of a sufficient degree to constitute an adventure in the nature of trade".

Nunn argued that if, as HMRC asserted, the asset disposed of was a plot of land with a building under construction, the land was being developed when sold which made it a trading asset at the point of disposal. For it to have been a trading asset at that point it followed that it must have been transferred to trading stock at the point at which development commenced.

Weed it and weep

The FTT agreed with the taxpayer, concluding that the 2 June letter fundamentally altered Nunn's relationship with his land, hence this was the disposal date for CGT purposes and PRR applied.

From the point of appropriation the taxpayer was trading in property development, although the case is silent on any further income tax consequences arising from that.

Replies (2)

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By Paul Crowley
17th May 2024 17:00

This looks like the FTT making stuff up to frustrate the law, because the law resulted in unfairness.
Another comparable to the long line of FTT HICB cases.

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By Ruddles
22nd May 2024 13:51

I expect this decision to be appealed. It seems wrong to me.

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