Principal Private Residence relief – the importance of ‘status’
Availability of Principal Private Residence relief where building work on part of a garden commenced before contracts for the sale of that land had been exchanged – Dickinson v HMRC  UKFTT 653 (TC).
The First-tier tax tribunal was asked to consider whether Principal Private Residence (‘PPR’) relief was still available where the seller of part of her garden allowed the purchaser to begin groundworks on the land before contracts were formally exchanged. Did this work mean the land had lost its character of ‘garden and grounds’ within the meaning of s.222(1)(b) Taxation of Chargeable Gains Act 1992 (‘TCGA 1992’) before the disposal took place? If so, PPR relief would no longer apply to the gain made on the sale of the land. The Tribunal’s decision supports the proposition that change of use of ‘garden or grounds’ would have to be permanent, or regarded as permanent, for that land to be taken outside the ambit of s.222 TCGA 1992.
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Mrs Dickinson (the Appellant) owned land and property at Holly Lodge, Swineshead, in Lincolnshire. Holly Lodge, the home of the Appellant and her husband, had a large garden and grounds, including a tennis court. In 2007 the Appellant sold land comprising part of that tennis court to Ilex Developments Limited, a company of which she was a director. The price agreed for the land was £300,000, payment being deferred and payable in four equal instalments on completion of the sale of each of four dwelling houses to be built on the land.
Many years previously adjoining farmland had been earmarked for development and in 1989 part of the Appellant’s garden and tennis court (which was adjacent to the proposed access road to the farmland) had been included by the potential developer in an outline planning application. Over the following 10 years the farmland was developed into a large housing estate, during which time the Appellant renewed the outline permission on her garden/ tennis court every three years to keep it current.
In 2006 the Appellant learned that the ‘automatic’ right to renew outline planning permission was unlikely to continue. She intended to continue to live at Holly Lodge and, if she sold the land to which the outline permission applied, would have little or no control over what was built on it. She decided, therefore, to design and build the houses herself, forming Ilex Developments Limited with her husband and two friends to manage the project.
On 14 December 2006 Ilex ‘agreed’, subject to contract, to buy the land, and solicitors were instructed by each party to the contract. A provisional start date for the building work was agreed as Easter 2007.
The Appellant signed her copy of the contract, returning it to her solicitor undated, in readiness for exchange of contracts on or about 19 March 2007. The contract was ‘approved’ on behalf of Ilex by the company’s solicitors on 3 May 2007. No deposit was to be paid at exchange, and no consideration was to be received for the land until the sale of the completed dwellings. The Appellant said she believed (erroneously) that the contracts had been exchanged, and Ilex was given permission to start the groundwork for the development, which it did on 7 June 2007.
Ilex’s solicitors highlighted a problem relating to the potential access road for the houses, and sought to address the issue on behalf of their client. Once this was done, exchange of contracts took place, on 27 June 2007.
When the Appellant filled in her 2007-8 tax return, she did not disclose the sale of land, and no Capital Gains Tax was declared, on the basis that Principal Private Residence (‘PPR’) relief, under s.222 Taxation of Chargeable Gains Act 1992 (‘TGCA’) applied. In this hearing, the Appellant and HMRC jointly asked the Tax Tribunal to determine whether PPR did apply to the sale of land owned by the Appellant, or not.
S.222 TGGA 1992 states that:
“(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in—
(a) a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.”
S. 28 TCGA 1992 states:
“(1) Subject to section 22(2), and subsection (2) below, 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).
(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.”
HMRC argued that PPR relief was not available on the disposal of the land by the Appellant, because that land was not available to her as her garden or grounds within the terms of s.222(1)(b) TCGA 1992 at the date of sale. The land was already under development at the date contracts were exchanged. PPR relief could only apply if the conditions set out in s.222 were met on the date on which the land was disposed of, i.e.
1. It must be land which the owner has for occupation and enjoyment with the residence;
2. It must be the garden or grounds of the residence; and
3. The are of land must not exceed the permitted area (a point not under considerations at this hearing)
HMRC argued that as the land was under development at the date of exchange of contracts, 27 July 2007, it was not available to the Appellant at the time of the disposal as ‘garden or grounds’.
The Appellant’s case
Part of the Appellant’s case was to argue that this sale fell within the spirit, even if not the letter, of s.222 TCGA 1992; but this point was not addressed in the Judgment handed down. The technical aspect of the Appellant’s case rested on the fact that she had always had the right to demand that the property would revert to being a garden should the contract not be completed. This was expanded upon in various ways:
1. The land being disposed of had not been fenced off, as had been suggested by HMRC.
2. Although Ilex had been given permission to enter the land and start groundworks, no discussion had taken place, or formal terms and conditions agreed, regulating the company’s occupation of the land.
3. Neither the Appellant nor the company considered that the parties had entered into any kind of legal relations at commencement of the works.
4. Neither party considered that Ilex had been given exclusive occupation of the land.
5. Neither party considered that, in the event of the ‘agreement’ progressing to completion, Ilex would have any continuing or actionable rights of occupation against the Appellant.
The First-tier Tribunal drew the following conclusions having heard considered all the arguments:
- There was no doubt that contracts were formally exchanged on 27 July 2007.
- It was arguable that when Ilex commenced the ground works that constituted an ‘act of part performance’ of the agreement (albeit as yet only in draft form) which effected a ‘disposal’ for contractual purposes. At that time, the land remained part of the garden and grounds of Holly Lodge. Ilex may, however, have started the work on the basis of a mistaken belief, held by both parties, that a legally binding contract was in place, and in such circumstances it is unlikely that the doctrine of part performance would apply.
- It was arguable that the commencement of work by Ilex represented an implementation of the planning permission, permanently changing the legal status or character of the land. Without unconditional exchange of contracts, however, or some other form of pre-contract binding agreement permitting entry onto and development of the land, that cannot have been the intention of the parties.
- The expressions ‘garden or grounds’ in s.222 TCGA 1992 must be given its ‘ordinary everyday’ meaning. The Tribunal continued:
‘The words “garden or grounds” can include land not given over to gardens or other common domestic usage and may change from time to time. However for land to lose its character as ”garden or grounds”, the change must be permanent or regarded as permanent. The change cannot be transient or conditional.’
- The Tribunal found that Ilex was allowed onto the land to start work on an informal basis. There was no agreement allowing Ilex access to carry out the work. Neither was there a licence to occupy, nor any provision in the (draft) contract affording such rights. At any stage prior to formal exchange of contracts either party was at liberty to ‘walk away’ from the transaction.
- The Tribunal concluded that Ilex entering onto the land and starting work did not constitute a disposal of the land. The land therefore retained its character as ‘garden or grounds’ within the meaning of s.222(1)(b) TCGA 1992 until the time of its disposal on 27 July 2007 when contracts were exchanged. As a consequence, the disposal of the land attracted PPR relief.
Practice points/ points of interest
- This case illustrates the importance of land retaining the status of garden or grounds up to the date of disposal.
- It also highlights that the use of land can change over the period of ownership. It appears that temporary change from domestic use of ‘garden or grounds’ should not trigger the loss of PPR relief.
- The decision is a useful reminder that practitioners should always be aware of the stage a transaction has reached, and keep the clients fully informed of potential consequences of action they take.
- Had the parties chosen to formalise the company’s access rights prior to exchange of contracts, the situation might have had a different outcome. Practitioners should seek to ensure the consequences of such an agreement are fully understood by the parties involved.
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