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Peter Vaines of Squire Sanders notes a recent case which involved the sale of part of a taxpayer's garden, which did not go well for HMRC.

I have written quite a lot recently on the main residence exemption for capital gains tax and the difficulties in ascertaining what represents a residence for this purpose. That uncertainty continues.

However, HMRC are now pursuing another tack which appeared in the recent case of Dickinson v HMRC TC 3027.

The taxpayer had a house and garden which included a tennis court. She sold part of the tennis court to a developer (it must have been some tennis court because the developer was going to build four houses on it. Anyway I digress). HMRC claimed that this disposal did not benefit from the main residence exemption in TCGA 1992 s 222 which provides an exemption for the disposal of:

1. a dwelling house or part of a dwelling house which is, or has at any time in his period of ownership being, his only or main residence, or
2. land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.

HMRC argued that when the land was sold (i.e., when contracts were exchanged) the taxpayer no longer had the land for her own occupation or enjoyment with her residence because it had become a building site and could no longer be regarded as garden or grounds.

It is relevant to this argument that (a) above refers to the dwelling house which is, or has at any time during his period of ownership been, his only or main residence, whereas (b) refers to "land which he has for his own occupation and enjoyment". The use of the present tense means that the occupation and enjoyment of the land must continue until the moment of sale.

One might think section TCGA 1992 s 223(1) would be helpful as it says that the gain is exempt if the dwelling house had been the only or main residence throughout the period of ownership, or throughout the period of ownership except for all or part of the last thirty-six months [ - for now, at least! ]. In other words you get three years to sell the property after you have moved out without losing any of the exemption. However, this refers only to the dwelling house and not to the garden or grounds.

The underlying thinking here is clear enough. If I have a house and I sell part of my garden then the gain on that disposal qualifies for the exemption. If however, I sell my house and most of the garden but hang to a bit of garden and sell it later, the subsequent sale of that piece of land will not qualify for the relief because it is not a residence and neither is it the garden or grounds of a residence - the residence has already gone. This was the substance of the decision in Varty v Lynes 51 TC 419.

However, in the case of Mrs Dickinson she was still living in the house and certainly the tennis court had been part of her garden or grounds - it was just that before contracts were exchanged, she let the developers in to dig up the tennis court. (The fact that she controlled the development company does not affect the position.) HMRC said this meant it was no longer part of her garden or grounds and relief should be denied.

Surely not. My garden may be a mess but it still my garden; it may be being dug up but while I own it, it is still my grounds which I have for my own occupation and enjoyment with my residence. That status must surely continue until it is disposed of, so I must surely be entitled to the exemption.

But HMRC had another argument. They said that by allowing the developers to dig up the tennis court before exchange of contracts this gave rise to some kind of disposal so that by the time contracts were exchanged Mrs Dickinson no longer had the property at all. The Tribunal did not think much of this either. Accordingly, Mrs Dickinson was entitled to her relief. (If the developer entering on to the land and commencing work did cause a disposal for capital gains tax purposes, then the relief must have surely still been available for the same reasons.)

Such a literal interpretation sems hardly justified in a relief of this nature. Indeed it is wholly inconsistent with TCGA 1992 s 223(1) and the allowance of the extra thirty six months. During that three year period after the taxpayer has moved out but before the property has been sold, he will not be in occupation (except in a very technical sense) but he certainly will not be enjoying it because he is living somewhere else. Accordingly, on the HMRC argument, during that three year period, the exemption continues for the house, but not the garden. Fortunately, the Manuals shows that HMRC do not take this point, but their stance seems rather inconsistent in the context of this case.