Lee Sharpe looks at a tax case that went horribly wrong for the taxpayer and has implications for others who sell garden plots out of their main residence.
After the recent death of Charlie Watts, reading the case Whyte v HMRC [2021] UKFTT 0270 (TC) put me in mind of one of the Rolling Stones’ best tracks*. The case is 135 pages long, making me wonder if someone had nothing better to do during the pandemic. But apparently the bundle of evidence papers given to the tribunal was around 3,000 pages, so maybe he was just sharing the pain.
The case involves the sale of six housing plots out of the grounds of a substantial main residence. It may interest many homeowners who might hope one day to exploit the capital gains tax (CGT) relief potentially available, as part of ‘only or main residence relief’ (otherwise known as ‘principal private residence’ (PPR) relief) in TCGA 1992, s 222 and following.
Gimme shelter!
The taxpayer in Whyte (Mrs Whyte) acquired a large, run-down property (11 bedrooms) called ‘Bunny Hall’ in 2001, with an estate of 6.88 hectare (i.e., 17 acres), to be her family’s PPR. Disappointingly, the judge admonishes that the Hall gets its name from the River Bune (rather than being Fiver’s last known address).
The timeline is not clear (little in this case is!) but roughly two to three years later, Mrs Whyte part-developed and then sold six plots out of The Wilderness Garden, which formed part of the estate. While some of the confusion is down to almost 20 years having elapsed up to the tribunal hearing, it is probably germane that the sale was from Mrs Whyte to her husband Mr Whyte’s building firm (in which Mrs Whyte had previously been a partner).
HMRC disagreed the sales of the plots should be CGT-free, arguing that Mrs Whyte had always intended to develop the plots as houses for sale at a profit, so the transactions should be subject instead to income tax as a trading venture.
HMRC will sometimes argue that there is a ‘supervening trade’ on the development of an ostensibly capital asset (see, for example, HMRC’s Business Income manual at BIM20315), and it certainly did not help the Whytes’ case that both Mr and Mrs Whyte had previously been involved in the building trade – including extensive property development.
If HMRC is successful in the supervening trade or income argument, PPR is potentially irrelevant; simply put, if a gain is taxable as income, it is not subject to CGT; income tax takes priority (e.g., see HMRC’s Capital Gains manual at CG10260).
Miss you
The fact that Mr Whyte was not called as a witness to the tribunal hearing clearly rankled the judge – over many, many pages. It did not help that Mrs Whyte frequently found her memory lacking and sometimes contradictory. In summary, this left the tribunal to fill the gaps and conclude that it was really Mr Whyte who drove the acquisition of and developments on Bunny Hall Estate, with his wife acting ‘on his behalf’ to ensure that assets were not at risk if he suffered insolvency.
A key issue (that clearly frustrated the judge that he could not discuss with Mr Whyte directly) was why it had been necessary for Mrs Whyte to proceed quite so far with developing the plots prior to their sale to Mr Whyte. The judge was unhappy with the taxpayer’s argument that Mr Whyte had been unable to get loan finance for his side of the development until the plots had been partly developed (‘serviced’), pointing out that it was actually Mr Whyte who had been funding that preliminary work to the plots for Mrs Whyte in the first place. This would come back to bite the taxpayer, as we shall see.
Worse was to come for the taxpayer herself, as the judge found her not to be a reliable witness, and either “knowingly not telling the truth, or knowingly not telling the complete truth”.
“I do not believe Mrs Whyte has a passion for architecture (Georgian or otherwise), or that she fell in love with Bunny Hall and wanted to restore it as a labour of love. All the evidence is that it was Mr Whyte, and Mr Whyte alone, that [sic] took responsibility for the restoration of the Hall.”
Another passage revealed that Mr Whyte had previously told an HMRC officer, regarding a material discrepancy over the recording of the actual cost of works at Bunny Hall, “in the real world, one has to put these things down on paper to get what one wants”.
Sympathy for the Devil?
The case heard evidence from expert witnesses from both sides in relation to what should be the ‘permitted area’ of garden or grounds; by default, where the garden or grounds of a dwelling-house do not exceed 0.5 hectare (including the dwelling-house), then a part-disposal thereof may rank for PPR relief. But larger areas are allowed where reasonably required for the enjoyment of the dwelling-house, having regard to its size and character. Here, the house plots needed to form part of such enhanced gardens or grounds to potentially enjoy PPR relief – but Bunny Hall was a substantial property.
The tribunal seemed rather dismissive of the taxpayer’s expert witness, making numerous criticisms of his arguments while also defending HMRC’s expert witness. To an extent, this is understandable; after a particularly scathing evaluation, the judge points out that much of the former’s assessment of the enhanced permitted area for PPR purposes for comparable properties was actually based on the criteria for IHT exemption for national heritage estates (“he compares apples to Thursdays”).
Yet the judge made little over the fact that HMRC’s expert witness had:
- agreed it was wrong for her to try to find just the minimum acreage required to satisfy the permitted area of garden or grounds; and
-
come to the fight with two alternative plans for the minimum area, one of which excluded the site of the new house plots originally because HMRC had insisted that they could not qualify as garden or grounds,
finding in both cases that she had then modified her position and everything was fine. Ironically, there was little difference between the experts’ assessments of the permitted area in the end. Ultimately, it would not affect the outcome of the case.
Paint it black
Unfortunately for the taxpayer (and, potentially, the rest of us) the tribunal concluded that the venture to sell the partly-developed plots was trading, and could not benefit from PPR as a part-sale of garden or grounds.
Readers hoping Dickinson v HMRC [2013] UKFTT 653 (TC) might help will be disappointed. In that case, the taxpayer won despite preliminary groundworks prior to selling the plot, but this tribunal distinguished the cases basically because the taxpayer in the earlier case had mistakenly started work thinking the plots had already been sold, while Mrs Whyte had been well aware of the extent of work prior to sale or disposal.
And it was the extent of that pre-sale development work that really did for the taxpayer in the end:
“I would have given Mrs Whyte the benefit of the doubt if the work done whilst the plots were in her ownership was merely obtaining planning consent (and, possibly, building the access road and bringing utilities to the plots).”
The tribunal’s attitude towards the Dickinson case is particularly worrying, as it is clear HMRC actively dislikes Dickinson.
And finally…
The judge nicely pointed out that it was difficult for the taxpayer to argue the house plots were part of garden or grounds required for the reasonable enjoyment of her home, after arguing she couldn’t say how progressed the works had been because she’d never ventured that far to look. HMRC may use that to back up its argument that a plot cannot usually be ‘required’ as garden or grounds in the first place, if you are happy to sell it (see CG64832).
*Yes, I know it wasn’t Charlie on the original recording, but Jimmy Miller; however, Charlie got there in the end!
