Espalier Ventures Property (Lansdowne Road) Ltd v The Commissioners for HMRC

In accordance with the judgment of the Court of Appeal in Fanning v HMC [2023] EWCA Civ 263 the Appellant invited me to apply a purposive interpretation to the relevant provisions FA03. In so doing I am to determine the nature of the transaction to which the legislation was intended to apply and then determine whether the land interests purchased in consideration for the payment of £5,350,000 answers the statutory description. In so doing I must seek to avoid an absurd result thereby ensuring that the intention of Parliament in enacting the provisions is met. The exercise I am to undertake in this regard should, the Appellant submitted, take the context of the statute as a whole and interpret it in its historical context.

The Appellant contended, by reference to the language of section 43 FA03, that neither the Garages nor the interest in the Communal Gardens represented an interest or right appurtenant or pertaining to the Flat but represented of themselves independent “subject matter[s]” that did not meet the definition of dwelling. Accordingly, unless the requirements of section 116(1)(b) or (c) were met the appropriate Table for SDLT purposes was Table B. The Appellant’s submissions appeared to assume that the provisions of section 116 and Para 18 FA03 were the same. However, they are not.

By reference to the explanation provided in Halsbury’s Volume 87 the Appellant submitted that in order for the freehold interest in the Garages and the right to use and enjoy the Communal Gardens to be appurtenant to the interest in the Flat the respective interests needed to be “validly annexed to” and inseparable from the leasehold interest in the Flat and/or the Freehold Share.

It was contended that the freehold interest in the Garages could not represent an interest appurtenant or pertaining to the Flat on the basis that the interests were entirely independent. The leasehold interest in the Flat made no reference to the Garages and vice versa.

The submissions as to the nature of the interest in the Communal Garden were that:

On the basis that neither interest was one which was appurtenant to the interest in the Flat it was contended that none of the gateways represented in section 116 FA03 were met and that accordingly there was a mixed use transaction:

No substantive case was advanced by HMRC that the Garages were not a separate and main subject matter of the transaction. Their case was predicated on the Garages being included within the definition of dwelling either under Para 18(3) or (4).

By reference to Hyman they contended that grounds and gardens (for the purposes of Para 18(3)) carried their ordinary meaning and included the land surrounding the dwelling and occupied with it. HMRC referenced the FTT decision in Brandbros Ltd v HMRC [2021] UKFTT 157 (TC) as confirming that the point at which the requirements of Para 18(3) are met is to be determined at the effective date of transfer. As at that date I must determine whether the Garages were buildings within the grounds of the dwelling.

The answer to the question is, in HMRC’s submission, a multifactorial exercise undertaken by reference to a number of factors as identified in Faiers v HMRC [2023] UKFTT 212 and include common ownership (a necessary but not sufficient condition) historic and future use, layout, proximity, extent, legal constraints, etc.

HMRC contended that when the evidence of these factors is considered it is clear that the Garages formed part of the grounds, in particular by reference to the proximity and layout of the properties. To the extent it was necessary to consider the use of the Garages HMRC contended that in the period from construction to 2007 the Garages had been in common ownership and had been constructed as garages for use by the occupants of 43 Lansdowne Road, latterly the Flat. Between 2007 and 2015 HMRC contended that there had been no commercial use of the Garages as they had been used as storage (a conventional use of garage space). Any income derived from the Garages (even were that commercial in nature) had, in any event, ceased several years prior to the effective date of transaction. From 2016 the intended use of the Garages had become plain – they were to be demolished as part of the proposed conversion of the Flat and the upstairs property into a single and substantial dwelling with the site of the Garages becoming a garden room.

HMRC also contended the interest in the Garages subsisted for the benefit of the Flat as they were space available for domestic use by the owner of the Flat falling within Para 18(4).

HMRC contend in accordance with the judgments in Ellenborough Park Re Davies (deceased) and others v Maddison and another [1956] Ch 131 (Ellenborough) and Regency the terms of the lease and noted rights on the title meant that the right to use and enjoy Communal Garden represents an easement appurtenant to the Flat with the consequence that the main subject matter of the transaction for the Flat included the appurtenant Communal Garden which was wholly residential.

HMRC relied on the FTT judgment in Sexton and another v HMRC [2023] UKFTT 73 (TC) which concerned the purchase of a flat and the right to use a communal garden. This garden was not one under TGPA. The lease for the flat in question provided that upon payment of the garden rent (as defined in the lease) the tenant had the right to walk and sit in the garden and to be provided with a key to gain access to it. Reliant on the judgment of the Court of Appeal in Ellenborough and the seminal text Megarry and Wade (setting out the requirements of an easement discussed above by reference to Regency), the Tribunal considered that the terms of the lease relating to the garden represented an easement and included within the main subject matter of the flat lease and thereby residential.

Were the Tribunal to conclude that the Communal Gardens represented a separate (and main) subject matter of the transaction HMRC contended that it met the terms of both Para 18(3) and (4) on the basis that the Communal Gardens were to be occupied and enjoyed with the Flat and the interest subsists for the benefit of the Flat.

HMRC contended that there was nothing in the statutory language that precluded such a conclusion by reference to the fact that the Communal Gardens would then represent part of a number of dwellings and that the Tribunal in Hyman recognised that it was not fatal that other people may also have rights over the land constituting part of a dwelling.

HMRC pointed to the title to the Flat and the manner in which it had been held out for sale in 2018 as confirming that the rights in connection with the Communal Garden benefitted the dwelling. They relied on Nael Khatoun v HMRC [2021] UKFTT 104 (TC) in this regard. In that case Mr Khatoun purchased a freehold property and acquired rights to enter and use communal gardens from an independent third party. The taxpayer contended that the right to use the communal garden was not a personal right but a proprietary interest forming part of the transaction but not one which met the terms of section 116(1) FA03. The Tribunal determined that the interest was a licence to use land which was exempted and therefore not a chargeable interest with the consequence that the whole of the consideration payable by the taxpayer was in respect of a residential property interest. However, the Tribunal expressed the view that had it not already rejected the taxpayer’s appeal it would have concluded that the interest was one which met the terms of section 116(1)(c) FA03.

Reliance was also placed on Sexton in which the Tribunal considered that the interest to use the gardens was squarely within section 116(1)(c) FA03 on the basis that the interest was not a personal interest but one for the benefit of the property under the lease. The taxpayer’s argument that the interest must be for the benefit of the dwelling in question and not a communal benefit was rejected in the context both of whether it was an easement and in connection with 116(1)(c) FA03. The Tribunal considered that the right that benefited the flat in question was the same as rights granted to other property owners but subsisted only for this flat.

I approach the issues to be determined in this case adopting a purposive interpretation to the relevant statutory provisions. By reference to the language used, the context and the purpose of the provisions I consider that it is plain that parliament intended to tax the sale of land interests to a company at the higher rate where those interests which were together to become a single dwelling as defined i.e. including garden, grounds and subsisting rights which are enjoyed together.

HMRC accepted that the Garages formed part of the main subject matter of the transaction but contended that they fell within Para 18.

Whether it was formally conceded or not I take the view that as the legal titles to the Flat and the Garages were separated and at least theoretically could have been under separate ownership any concession on this point was well made. The Appellant did intend to purchase the Garages and the Flat and those formed the “main subject matter”.

Accordingly, I have to consider whether the provisions of Para 18 apply.

Considering paragraph 18(3) first. HMRC’s case was predominantly put on the basis that the Garages formed part of the grounds. There is no question that for the purposes of section 116(1)(b) that must be the focus of attention as in order to come within those provisions the land in question must be the grounds or garden “of” the dwelling.

However, Para 18(3) is not in precisely the same terms and the scope of dwelling is extended to include “land that is, or is to be occupied or enjoyed with, a dwelling … (including any building or structure on that land)”. The similar extension to the definition of a residential property under section 116(1)(b) FA03 is “land that is or forms part of the garden or grounds of a [dwelling]”. In my view the focus of Para 18(3) is somewhat different to that of section 116(1)(b). There appears to be a clear foundation for concluding that any structure on the land which is the subject of the land transaction in question in respect of which it is proposed that the land will be occupied or enjoyed “with” the dwelling is to be taken to be part of the dwelling.

Under section 116(1)(b) FA03 I would have considered factors such as: 1) the historic use – in this case by reference to the facts found, use as domestic garages with some informal permitted use by others (in my view falling short of commercial use); 2) proximity – the Garages were physically proximate and had formed part of the garden area and grounds prior to severance of the title; 3) common ownership – the Garages had throughout been in common ownership; 3) there was no legal restriction precluding use by the owners of the dwelling. I would likely, on the basis of those factors, have considered that the Garages were buildings within the grounds of the Flat and within section 116(1)(b) FA03.

However, the relevant provision for me to apply is Para 18(3). There was a plain intention at the point of purchase by the Appellant to develop the property, including the Garages into a substantial single dwelling incorporating the Garages into the fabric of the living space; this was entirely consistent with the approved planning applications. That was the purpose for which the Appellant was established and for the purchase of the three land interests. In my view there can be no question at all that the Garages were land which was capable of representing independently a main subject matter but as the intention was for the Garages “to be… occupied with the dwelling” and were so occupied they such that the land transaction relating to the Garages is to be taken to be part of the land transaction concerning the Flat and of a dwelling pursuant to paragraph 18(3).

As set out above the Appellant contends that the interest in the Communal Gardens is not an easement appurtenant to the leasehold interest in the Flat or the Freehold Share. In substance, that is because the interest is one which arises under the provisions of s1 TGPA.

I start by noting section 43(6) FA03 provides that an interest arising under a statutory provision is a relevant interest for the purposes of the relevant part of FA03 which charges a relevant interest to SDLT. That does not, however, determine the rate at which SDLT should be charged.

I read with careful interest the judgment in Regency Villas. I was taken by the Appellant only to the opening paragraphs of Lord Briggs speech, but the remainder of the judgment and the conclusions reached demonstrate that the interest in the Communal Garden is an easement appurtenant to the leasehold interest in the Flat. Regency concerned what was known as a “facilities grant” i.e. the grant of use rights over the sports and recreational facilities to the timeshare owners with no maintenance or funding obligation. As indicated the Court concluded that the rights so granted were property rights and not personal rights. This was on the basis that the rights granted were for the benefit of not only the original transferees but also successors in title and were as to a comprehensive right to use the facilities as a whole then constructed or to be constructed. Four essential characteristics of an easement were identified: 1) there had to be a dominant and servient tenement, 2) the easement had to accommodate the dominant tenement, 3) the dominant and servient owners had to be different persons and 4) a right over land could not amount to an easement unless it was capable of forming the subject matter of the grant. The second and fourth features were in issue in that appeal. As regards the second it was identified that a right to use facilities to be enjoyed for their own sake could nevertheless represent an easement if the rights granted by the servient tenement accommodated the dominant tenement. On the facts of that case the right to use the facilities was “of service, utility and benefit” to the timeshare apartments (the dominant tenement). The fourth feature required that the rights be clear, not precarious in the sense of taken away at the “whim” of the servient owner and not so extensive or invasive as to oust the servient owner from the enjoyment or control of the servient tenement or for the servient tenement to be anything other than passive.

Applying those principles in the present case:

It is my view that the interest in the Communal Garden meets this definition of an easement which is appurtenant to the principal interests in the Flat and the Freehold Share and is not capable of being considered separately from them, they do not represent an independent main subject matter and form an ancillary part of the main subject matter being that of the Flat which is accepted as a dwelling.

This is so despite the valiant arguments of Mr Hickey asserting otherwise by reference to section 1 TGPA. My attention was drawn to Halsbury’s Laws of England vol 78 concerning Town Gardens which indicates that the act applies to enclosed gardens or ornamental grounds set aside (other than by the revocable permission of the owner) in which the inhabitants have a legal right to use and enjoy. The narrative goes on to explain, in essence, that an inhabitant with rights to use and enjoy a garden or ground covered by the TGPA may require the local authority to protect the right and that the authority in question must take charge of any neglected garden or ground. The authority must (if requested by the owners and occupiers with rights to use and enjoy the garden or ground) vest it in a committee of the inhabitants in order to keep it for use of those inhabitants and if those inhabitants do not wish to take charge the local authority must maintain it but for the benefit of the public.

That narrative reflects my interpretation of the provision and does not, in my view, assist the Appellant in any way in its argument. The right derived under section 1 TGPA by the occupier of the Flat (i.e. the person liable to pay council tax) is simply that in the event that the Communal Gardens become neglected such that the Royal Borough of Kensington and Chelsea take charge of it, such inhabitant (together with two thirds of the other inhabitants) may require the Royal Borough of Kensington and Chelsea to vest the Communal Gardens in a committee of them (and for the benefit of them) or to take charge of them for the benefit of the public. However, in order for the occupier to have such a right the owner (and where different the occupier) must have a legal right to use and enjoy the gardens. Section 1 TGPA is not, in my view, the source of the rights associated with the use of the Communal Garden.

I was also referred to the website of the Royal Borough of Kensington and Chelsea which provides the answers to frequently asked questions concerning communal gardens. The response to the first question gives the impression that the right of an occupier of a surrounding house to use and enjoy communal gardens is derived from TGPA. I consider that impression to be an inaccurate reflection of the law. Certainly in the case of this Communal Garden it is my view that the right to use and enjoy is a legal right bestowed upon the owner and where occupied by someone other than the owner, the occupier of the Flat under the leasehold title and as noted on the registered title. Accordingly, the Appellant acquired that interest as part and parcel of its acquisition of the Flat.

I note, though it is not necessary for me to decide, that section 43 FA03 includes interests appurtenant or pertaining to the main subject matter. The Appellant made no submission on the meaning of pertaining but on the basis that pertaining to is something different from appurtenant to (because parliament chose to include both) I would have concluded that even if not appurtenant, giving “pertaining” its ordinary meaning “belong to something as a part, appendage, or accessory” the interest in the Communal Gardens is pertaining to the leasehold interest in the Flat.

As a result of that conclusion the Appellant’s case regarding the Communal Gardens fails.

Had I not reached that view I would have then needed to have considered the provisions of Para 18(3) and (4). I noted above that the Appellant argued its case on the basis of section 116(1)(b) and (c). HMRC correctly argued the case on the basis of Para 18 but indicated that there was no material difference to the two sets of provisions when applied to the facts of the case. It appears to me that there is a material difference in the provisions which, in light of the analysis provided in Sexton would appear to make a material difference, or at least in the context of paragraph 18(3).

As noted above section 116(1)(b) FA03 requires that the gardens be “of” the residential property. In Sexton Judge Baldwin considered that it would seem strange to conclude that a garden which does not adjoin the dwelling nevertheless formed part of the grounds or gardens “of” the dwelling. A view with which I would agree. However, Para 18(3) only requires that the land be enjoyed with the dwelling as a garden or grounds. In my view the Communal Gardens were quite plainly intended to be “enjoyed with the dwelling as a garden” and would thereby have qualified within the definition of dwelling. For the reasons stated by Judge Baldwin I would also consider they meet the terms of paragraph 18(4) Schedule Z4A which are identical to section 116(1)(c).

On the basis that the Garages to be taken to be part of the dwelling by virtue of Para 18(3) and the right to use and enjoy the Communal Gardens are appurtenant to the Flat the Appellants paid £5,350,000 in consideration for a single dwelling for the purposes of Schedule 4ZA with the consequences that for the purposes of section 55 FA03 Table A as adjusted applies and SDLT is payable at the higher rate.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.