Intention of Parties Relevant – Private Residence Relief (A Dickinson -TC3037)

The case of A Dickinson involved private residence relief and rested on when the character of land ceases to be that of garden and grounds where there is development planned.
The taxpayer owned a house with large garden and grounds, including a tennis court.  In 1989 part of the taxpayer’s garden and tennis court were included in a developer’s approved planning permission application.   The taxpayer had continued to automatically renew the planning permission every three years.
Sometime in 2006 the taxpayer learned that she was no longer going to be able to automatically renew the planning permission.  She therefore decided that rather than sell the land direct to a developer she would  design and build the houses herself. So, with her husband and two friends she formed a company, “Ilex Developments Limited” to manage the project.
On 14 December 2006, Ilex “agreed”, subject to contract, to buy the land. Solicitors were instructed by each party.
The taxpayer said that at this stage she assumed (erroneously) that contracts had been exchanged, and Ilex was given permission to start work on the groundwork for the development, which it did on 7th June 2007.
There were in fact some teething issues with the highways agency and contracts were not actually exchanged until 27 July 2007.
Mrs. Dickinson’s 2007-08 tax return was submitted but did not disclose the land sale on the basis that Private Residence Relief was applicable under s.222 TCGA 1992, as the land formed the garden and grounds of her private residence.
HMRC’s Position
An enquiry into the return was subsequently raised.
HMRC refused the claim on the basis the land was already under development when the contracts were exchanged.  They argued that it had to be available to the owner as “garden or grounds” on the date it was sold for relief to be granted.
As a result they raised an assessment to tax of £48,314.20 plus interest.
First-tier Tribunal’s Decision
They concluded that the commencement of ground works by Ilex did not constitute a “material start”,  thus permanently changing the legal status or character of the land.
This was because without an unconditional exchange of contracts, or some other form of legally binding pre-contract, permitting entry onto and development of the land, it cannot have been the parties’ intention.
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.
Ilex was allowed onto the land disposed of to start foundation work on an informal basis.  There was no agreement allowing Ilex access onto the land to carry out the works.  At any stage prior to formal exchange of contracts, if for example the access problem had proven to be insurmountable, either party was at liberty to “walk away” from the transaction.
If the transaction had not progressed to completion it could not be suggested that the land had temporarily ceased to be “garden or grounds”, only to have reverted to its original status on the transaction becoming abortive.
They concluded that when Ilex entered onto the land and started the works it 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) until the time of its disposal on 27 July 2007 when contracts were exchanged.
The disposal of the land therefore attracts principal private residence relief and the taxpayer’s appeal was allowed.