Tribunal confirms principal private residence relief available where development began before sale of land

In Andrew Nunn v HMRC [2024] UKFTT 298 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's claim for principal private residence  (PPR) relief from capital gains tax where the taxpayer had entered into an agreement with a developer to carry out development on land that formed part of the taxpayer's property before the exchange of formal contracts to sell the land.

Background

In November 1995, Andrew Nunn purchased a property in Oxfordshire for £120,000.

In 2015, Mr Nunn reached an agreement with a property developer, Michael Daly, acting on behalf of his company, MA Daly Building Contractors Ltd (Daly’s), for the sale of a part of the garden at the rear of Mr Nunn's property for £295,000. Mr Daly intended to build two houses on the land and obtained planning permission for the intended development in April 2015. Heads of terms for the sale were agreed in late 2015 or early 2016. Mr Nunn and Daly’s then instructed their respective solicitors to prepare the formal sale contracts. 

In January 2016, Mr Nunn’s solicitors provided a draft sale contract to Daly’s solicitors. The sale did not progress at that time, in part because Daly’s intended to complete a transaction relating to the adjoining property first. By June 2016, formal contracts had still not been agreed. Daly’s were keen to begin work on the development. In order to provide some comfort to Mr Daly, Mr Nunn signed a letter from Mr Daly dated 2 June 2016 (the 2 June letter) which stated:

“As discussed we have now discharged all conditions relating to the planning consent on your property. We really would like to commence work ahead of contracts being signed as I think this will still take 2-3 months and we are ready to start now.

We have agreed heads of terms which are currently being converted into the contract and the gross purchase price is fixed at £295,000 as planning consent has been granted.

As we agreed, please sign and return this letter in confirmation that this constitutes a contract ahead of formal contracts being signed. I am sure you appreciate that this is required by me to mitigate the risks of commencing construction at this stage.”

Following the signing of the 2 June letter, Daly’s erected a fence to partition the land from the remaining garden and began construction work. 

In September 2016, a formal contract of sale was signed. The agreed terms of the sale were that £195,000 would be paid on completion of the land sale and a further £100,000 on the completion of the sale of the second house to be built on the land. On 7 September 2016, the sale completed and the £195,000 initial payment was paid. By this time, development was significantly advanced. The foundations of the houses had been laid and brick walls built sufficiently high that scaffolding had been erected for the construction of the second storey.

In January 2018, Mr Nunn submitted his 2016/17 self-assessment tax return and claimed PPR relief. In December 2018, HMRC notified Mr Nunn that it was opening an enquiry into his 2016/17 tax return, under section 9A, Taxes Management Act 1970 (TMA). In September 2021, HMRC issued a closure notice, under section 28A, TMA. The closure notice disallowed the claim forPPR relief with the result that the disposal of the land was charged to capital gains tax (CGT) in the amount of £72,633.80. In October 2021, HMRC also issued a notice of a suspended penalty assessment in the sum of £20,155.87. Mr Nunn appealed both notices to the FTT. 

FTT decision 

The appeals were allowed.

Section 222, Taxation of Chargeable Gains Act 1992 (TCGA), provides, so far as relevant, as follows: 

"222 Relief on disposal of private residence

(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in–

…..

(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.

(2) In this section "the permitted area" means, subject to subsections (3) and (4) below, an area (inclusive of the site of the dwelling-house) of 0.5 of a hectare."

(Emphasis added)

There were five key issues for the FTT to consider in determining Mr Nunn's appeal: 

1.  Was the relevant date for determining the status of the land the date of disposal, or some other date?

The FTT concluded that the date upon which the section 222(1)(b) requirement was to be assessed was the TCGA disposal date.

2.   What was the disposal date (or other relevant date)?

The FTT found that the 2 June agreement was not a contract for sale and it did not create a constructive trust. However, the FTT found that an appropriation to trading stock took place on 2 June 2016. This was the date upon which Mr Nunn entered into the agreement with Daly's. This agreement (whether or not legally enforceable) fundamentally altered Mr Nunn's relationship with his land. The result of that agreement was that the land was to be separated from his garden and new houses built upon it. He held the land for the purposes of allowing the development to commence and to sell it, most likely to Daly's. As a result, the FTT held that a deemed disposal of the land, for CGT purposes, took place on 2 June 2016 (rather than on 7 September 2016, when formal exchange of contracts took place).

3.  At the relevant date, was the land in question land Mr Nunn had for his own occupation and enjoyment with that residence as its garden or grounds?

The FTT found that at the date of disposal (i.e. on 2 June 2016), the land in question was land Mr Nunn had for his own occupation and enjoyment. This was because on that date that land had not yet been separated off and was still part of his back garden.

4.  If PPR relief is not available, what is the correct rate of CGT to apply?

As the FTT decided that PRR was available to Mr Nunn, it was not necessary for it to decide the correct rate of CGT. 

5.  Should the penalty be upheld?

As the FTT found that HMRC was wrong to conclude that PRR relief was not available to Mr Nunn, the FTT directed that the penalty assessment  be set aside.

Comment

This decision will be welcome news to taxpayers who find themselves in a similar position to Mr Nunn. Taxpayers should pay particular attention to the nature of any agreement they make with a developer and any works entered into as a result of any such agreement; and also note the importance of the timing of key events such as the making of agreements and the commencement of development works. 

Mr Nunn's success follows a number of recent  appeals in relation to PPR relief claims in which taxpayers have been successful (see our previous blog on the Upper Tribunal's decision in HMRC v G Lee and another [2023] UKUT 242 (TCC)).

A copy of the decision can be viewed here.