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Principal private residence relief: commencement of works did not constitute a disposal of land for the purposes of the relief (First-tier Tribunal)
Practical Law UK Legal Update Case Report 3-549-8007 (Approx. 4 pages)
Principal private residence relief: commencement of works did not constitute a disposal of land for the purposes of the relief (First-tier Tribunal)
by Practical Law Private Client
| Published on 27 Nov 2013 • United Kingdom |
The First-tier Tribunal held that commencement of works did not constitute a disposal of land for the purposes of principal private residence relief (PPR) where a seller allowed the purchaser to work on the land on an informal basis before contracts were exchanged. The land remained within the meaning of section 222(1)(b) of the Taxation of Chargeable Gains Act 1992 until its disposal on the date contracts were exchanged. (Dickinson v HMRC [2013] UKFTT 653 (TC).) (Free access.)
Speedread
The First-tier Tribunal (tribunal) held that commencement of works by a purchaser did not constitute a disposal of land for the purposes of principal private residence relief (PPR) where a seller allowed the purchaser to work on the land on an informal basis before contracts were exchanged. The character of the land remained within the meaning of section 222(1)(b) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) until its disposal on the date contracts were exchanged. For it to lose its character, the tribunal held that the change must be permanent or regarded as permanent. In this case, there was no agreement allowing access to work on the land, no licence to occupy nor any term in the draft contract giving such rights. At any stage before formal exchange of contracts, the parties were free to walk away from the transaction.
The decision, while purely fact based, is a useful reminder for practitioners to be alert as to the stage a transaction has reached and of the need to keep parties fully informed. (Dickinson v HMRC [2013] UKFTT 653 (TC).)
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Relief from CGT on disposal of a private residence
Under section 222 of TCGA 1992, PPR from capital gains tax is available for gains arising on the disposal of either one of the following:
- A dwelling-house (or part of a dwelling-house) that has been an individual's only or main residence at some time during his period of ownership of the land (section 222(1)(a), TCGA 1992).
- Land that an individual has occupied and enjoyed with his main residence as its garden or grounds, up to a permitted area of 0.5 of a hectare or such larger area as is required for the reasonable enjoyment of the dwelling house or residence (sections 222(1)(b), (2) and (3), TCGA 1992).
Where an asset is disposed of and acquired under contract, the time at which the disposal and acquisition is made is the time the contract is made (section 28(1), TCGA 1992).
Where the contract is conditional, the time of disposal and acquisition is the time when the condition is satisfied (section 28(2), TCGA 1992).
Facts
Land that formed part of the grounds of the appellant's (Mrs Dickinson) home had been subject to outline planning permission for a number of years. When Mrs Dickinson learned that her automatic right to outline planning permission might end, she formed a development company, Ilex Developments Limited (Ilex), and decided to sell the land to Ilex in order to have control over what was built on the land. On or around 19 March 2007, Mrs Dickinson signed a contract for the sale of the land and returned it to her solicitors, in readiness for exchange of contracts. At that stage, the contract was technically in draft form. Ilex's solicitors approved the contract on 3 May 2007. Mrs Dickinson claimed that she thought the contracts had been exchanged at that stage and, on 7 June 2007, Ilex was allowed to begin the groundwork for the development. Contracts were formally exchanged on 27 July 2007.
Mrs Dickinson did not disclose the sale of the land in her self-assessment tax return for 2007-08, on the basis that PPR was available under section 222 of TCGA 1992. HMRC opened an enquiry into the possible omission of a capital gains declaration, under section 9A of the Taxes Management Act 1970. Before the tribunal, HMRC argued that the land was already under development on the date contracts were exchanged. As such, it was not available to Mrs Dickinson as "garden or grounds" within the meaning of section 222(1)(b) of TCGA 1992.
Decision
The tribunal held that Ilex entering onto the land and starting works did not constitute a disposal of land. The land retained its character as "garden or grounds" within the meaning of section 222(1)(b) of TCGA 1992. until the time of its disposal on 27 July when contracts were exchanged. Accordingly, PPR relief on disposal of the land was available.
The tribunal considered that the expression "garden and grounds" in section 222(1)(b) must be given its ordinary, everyday meaning. For it to lose its character as garden or grounds, the change must be permanent or regarded as permanent. In this respect, the tribunal found that Ilex was allowed onto the land on an informal basis. There was no agreement allowing access to work on the land, no licence to occupy nor any term in the draft contract giving such rights. At any stage before formal exchange of contracts, the parties were free to walk away from the transaction.