A recent First Tier Tribunal case, Heather Whyte v HMRC [2021] TC08215, has brought attention yet again to the peculiarities of the rules for trading transactions and Principal Private Residence Relief (PPR).
The case deals with an estate called ‘Bunny Hall’. Sadly, nothing to do with rabbits, but instead the River Bune, on which the village of Bunny is located. This slight disappointment aside, the case revolves around the sale of six plots of land on the edge the estate between 2003 and 2006. Planning consent for these developments was permitted in order to enable the restoration of Bunny Hall, a heritage property, and it was argued by Mrs Whyte that as a result the disposals and renovation should be viewed as a single composite transaction which gave rise to no net profit at all. HMRC believed Mrs Whyte ought to have paid either income tax on the development profits from the sale of the plots or alternatively CGT on the capital gain, to the tune of over £1.5 million. Mrs Whyte believed that HMRC was mistaken, that the sales were not trading transactions, and that no CGT was due as the plots qualified for PPR on the basis that they fell within the permitted area of her main residence.
...The case contains many helpful arguments...on the many controversial points surrounding development of the family home...
Mrs Whyte had carried out similar projects before and after the sales in question. She did not remember that profits on a previous transaction had been recategorized as trading. More critically perhaps, Mrs Whyte’s husband was a property developer whom she had worked with and for on development projects in the past. Her husband had loaned her the money to buy Bunny Hall, negotiated permissions for the building plots, developed the plots, renovated Bunny Hall and bought 5 of the 6 plots from Mrs Whyte to develop and sell.
On this fact pattern, the Tribunal was therefore left with a number of issues on which to decide. Firstly, whether the sale of the plots of land was part of a single overall transaction that included the renovations to the wider estate. Secondly, whether the disposals of the plots of land at issue were trading transactions for income tax purposes or not. Thirdly, whether Mrs Whyte could benefit from PPR to avoid paying CGT on the sales of land. Fourthly, whether a conservation deficit, being the amount by which the estimated cost of repair of a heritage asset exceeds, could be offset against the profits from the sales. And finally, the matters of whether Mrs Whyte held the proceeds of the disposal on trust, whether there was an overriding public interest in regarding the proceeds in any particular way, and whether a plot referred to as ‘Plot 6’ was disposed of in an arm’s length transaction.
The Tribunal found that the argument that Mrs Whyte was obligated to complete the sale in order to fund the restoration of Bunny Hall unpersuasive, as no compulsion existed to spend the sale proceeds exclusively on that cause. Working systematically through the Badges of Trade, the Tribunal found that whilst the acquisition was a capital transaction, there was an appropriation to trading stock, with development actively in progress to enhance the value of the plots not merely to entice developers. Therefore, these transactions were liable to Income Tax. Had the disposals resulted in a capital gain, the Tribunal found that on the balance of evidence, these plots had been denatured, that is separated from the rest of the grounds to the extent that they no longer formed part of them, and as such did not benefit from PPR on the sale. The ‘conversion deficit’ was not an offset allowed by the legislation against either Income Tax or CGT. As to the other points, the Tribunal issued a somewhat scathing dismissal finding that there was no trust, no public interest “in Mrs Whyte’s tax liability being computed otherwise than in accordance with the requirements of tax legislation”, and that ‘Plot 6’ was not sold at arm’s length.
So, what does this mean for the taxpayer or tax advisor going forwards? The case contains many helpful arguments which add to our growing collection of guidance on the many controversial points surrounding development of the family home. It offers insight into the approach the FTT may adopt when it comes to the ever-confusing application of the ‘badges of trade’ question where property is bought and sold. There is some very useful guidance on the level of groundworks that may tip the balance between investing and trading (planning consent, access roads and connection to utilities being perhaps permissible but the laying of foundations, brick work and concrete slabs definitely not) and on the issue of the timing and degree of separation for land to remain ‘gardens and grounds’.
However the main reason the sad saga of Bunny Hall merits very careful reading before any taxpayer embarks on litigation to secure PPR can be summarised in one golden rule:
Rule One: always gather a complete bible of documents, photographs, witness statements and reports that are contemporaneous with the transaction and an expert opinion that supports your filing position and then put them carefully away to await battle with HMRC.
You will be so pleased that you did!