CGT – disposal

The FTT has heard a case regarding a point of significant interest to landowners and developers involving the operation of principal private residence (PPR) relief for CGT. The case is fact-specific and the FTT allowed the taxpayer’s claim for PPR from CGT where the taxpayer has entered into an agreement with a developer to carry out development of land forming part of the taxpayer’s property before the formal exchange of contracts to sell the land. The FTT stated:

‘Was the land garden or grounds?

140. We have found that the relevant disposal of the land took place on 2 June 2016. Accordingly, we only need determine whether or not the land was land Mr Nunn had for his own occupation and enjoyment with his residence as its garden or grounds on that date. However, in case we are wrong on the deemed disposal issue, we also make findings as to the position on 7 September 2016.

141. The words “garden” and “grounds” bear their ordinary everyday meaning.

142. We find that on 2 June 2016, the land in question was land Mr Nunn had for his own occupation and enjoyment with that residence as its garden or grounds. This is because on that date that land had not been separated off and was in essence part of Mr Nunn’s back garden.

143. By 7 September, development works had been ongoing for some time. The land had been fenced off. Foundations had been dug, concrete poured and bricks laid. What was being built on the land were new houses, separate dwellings that did not serve to enhance Mr Nunn’s enjoyment of his remaining property.

144.C As such, we find that on 7 September the land was no longer “garden or grounds”. We do not consider it necessary to make findings upon whether Mr Nunn continued to hold the land for his own occupation and enjoyment on that date.

145. The result of our finding that on 2 June 2016, the land in question was land Mr Nunn had for his own occupation and enjoyment with that residence as its garden or grounds is that Mr Nunn is entitled to PPR Relief on the deemed disposal that took place on that date.

What is the correct rate of CGT?

146. As we have decided that PPR applies, it is not necessary for us to decide the correct rate of CGT. If we are wrong on the availability of PPR, no further factual findings need to be made in order for the issue to be determined.

Should the penalty be upheld?

147. As we have decided that HMRC were wrong to conclude that PPR was not available, we do not consider that HMRC have established Mr Nunn acted carelessly. The penalty assessment must therefore be set aside.’

What practitioners will find interesting is the following comments by the FTT:

‘Guidance on PPR position

148. We understand that cases such as this (where a developer wishes to commence development activities on land that has hitherto formed a part of the garden or grounds of a private residence prior to the completion of a sale of the relevant land) are relatively common, but do not often reach the Tribunal.

149. We therefore consider that it may be of assistance to offer some guidance (noting that our decision is not binding on any other Tribunal), in order to enable to taxpayers to make clear decisions as to how to proceed.

150. Steps taken by a developer in accordance with an agreement with a landowner will often (but not always) render the relevant land no longer a part of the garden or grounds.

151. It will often be clear that the developer is acting in the course of a property-development trade.

152. Therefore, if there is a clear agreement that the landowner and developer are jointly undertaking development, an appropriation is likely to have taken place by the time shovels are in the ground. This would be expected to enable PPR Relief to apply at the time of appropriation.

153. If the agreement between the developer and landowner is clearly documented, there is less room for doubt about the tax outcome.

154. In analysing such arrangements, the key matters to establish are

1. the timings of key events: the making of agreements, the commencement of development works and any ultimate disposal, and

2. the nature of any agreement entered into between developer and landowner, and any works undertaken as a result.

155. In our view, there are 3 situations that are likely to occur:

1. The land may retain its character as part of the garden or grounds up until the point of sale. Perhaps being simply demarcated to enable identification of the parcel of land to be sold. In this scenario, PPR would be likely to be available on the sale.

2. Development of the land may have begun in earnest some time prior to sale. The landowner may well have entered into an arrangement with a professional developer under which development activities are carried out and profits shared. In such circumstances an appropriation to trading stock at the time development commenced may well be the natural conclusion to draw. In this scenario, there is a reasonable likelihood that at the time of final disposal the landowner no longer holds the land as a part of their garden or grounds, but that the land was garden or grounds at the time development commenced. This would mean that (assuming all other requirements are met) PPR Relief would be available at the time of appropriation to trading stock.

3. A situation falling between 1 and 2 above may be possible. This would be where the land has been clearly dealt with in a way that is contrary to it retaining its character as garden or grounds, but where the extent of development activity, or the intentions of the landowner at the time of such dealing, fall short of giving rise to an appropriation to trading stock. A sale or appropriation subsequent to such dealing would be unlikely to qualify for PPR Relief.

156. In the present case, we consider that the facts fit scenario 2 above.’

See Nunn v The Commissioners for HMRC [2024] UKFTT 298 (TC) reported at www.bailii.org.

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