In Roger William Morgan & Anor v HMRC [2024] TC09221, the First Tier Tribunal (FTT) found that the beneficial ownership of land was transferred to a development company under a constructive trust, a year before legal ownership changed.
Mr and Mrs Morgan purchased ‘Cranfield’ in 1997 as a family home. In 2011, they decided to redevelop it.
- The house and garden were given their own title and the remainder of the grounds was divided into five plots.
- In January 2012, a company was incorporated to develop and sell Plots 2 to 5.
Building work on Plot 2 began in May 2013 and was completed in March 2014.
- In 2014, a TP1 transfer form was prepared by the company’s solicitors, transferring Plot 2 to the company.
- Board minutes were signed on 30 April 2014 approving the transfer of Plot 2 and recording the intention to transfer Plots 3, 4 and 5 in the future.
- The Land Registry record was dated 19 May 2014 with a transfer value on 30 April 2014 at £150,000. This was credited to Mr & Mrs Morgan’s Directors’ loan account on 8 May 2014.
Development of Plot 3 commenced in July 2015 and was completed by May or June 2016.
- Plot 3 and the undeveloped Plots 4 and 5 were transferred to the Company in July 2016 for a total of £360,000.
- This sum was credited to the directors’ loan accounts on 1 July 2016.
In January 2017, HMRC queried the tax position of the disposals.
- Mr and Mrs Morgan’s accountants provided a Declaration of trust to HMRC, executed on 30 July 2018, which provided that they had held Plots 2 and 3 on trust for the company, with it acquiring a beneficial interest on 1 January 2012 and 1 July 2015 respectively.
- In December 2018, Mr and Mrs Morgan’s 2016-17 tax returns were amended to include a £60,000 capital disposal, each, in respect of Plot 3.
- On 5 September 2019, HMRC issued a closure notice in respect of the amended 2016-17 tax returns, assessing Capital Gains Tax (CGT) of £31,500 each.
- On 27 March 2020, HMRC issued protective Discovery assessments for the 2015-16 tax year.
- It was common ground that the Closure notices and discovery assessments only related to Plot 3.
Mr & Mrs Morgan Appealed to the First Tier Tribunal (FTT), which found that the company had acquired the whole of the beneficial interest in Plot 3 in 2015-16, on commencement of works, under a Constructive trust.
- There was an express common intention that the company would acquire the beneficial interest.
- Mr and Mrs Morgan had distinct discussions about the company having a beneficial interest before legal transfers were made. They considered that “in substance and in reality” the company was the owner of the Plot once it started carrying out the development works.
- The parties’ conduct supported their express common intention: the carrying out of works, the payment of works, and (by the board minute) an intention to transfer Plot 3 in due course rather than immediately.
- An agreement had been reached and there was a clear plan from the outset. There were no additional terms to be agreed: the company’s interest in the Plots was clearly defined.
- The company relied upon the common intention to its detriment.
- The company had incurred expenditure in developing Plot 3.
- The fact that this was paid by Mr and Mrs Morgan on the company’s behalf via their directors’ loan accounts did not prevent this from being detrimental reliance by the company. It had incurred a liability to Mr and Mrs Morgan.
The FTT found that HMRC’s discovery assessment was valid:
- An officer of HMRC could not have been reasonably expected, on the basis of the information available before 31 January 2018, to be aware that any chargeable gain which ought to have been assessed to CGT had not been assessed.
- While a hypothetical officer of HMRC could reasonably have been expected to be aware that the disposal took place under a constructive trust, as letters from Mr and Mrs Morgan’s agents explicitly referred to this argument, they could not reasonably have been expected to be aware that the disposal took place in the 2015-16 year.
- Mr and Mrs Morgan did not tell HMRC when the construction began or when the disposal happened.
- Mr and Mrs Morgan’s agent’s letter to HMRC dated 12 May 2017 specifically referred to the disposal taking place in July 2016 (i.e. 2016-17). At that point, it was not contended that the disposal took place in 2015-16.
The appeals against the 2016-17 closure notices were allowed, while appeals against the 2015-16 assessments were dismissed.
Useful guides on this topic
Acting for a trust? Start here…
This is an essential guide for advisers and trustees on how to manage the tax affairs of a UK trust and how to avoid common pitfalls.
CGT: Date of acquisition or disposal
When is the date of acquisition or disposal of an asset for Capital Gains Tax (CGT) purposes? When do special rules apply? Why does it matter?
Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points.
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
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