Abigail Wilmore v The Commissioners for HMRC

Ms Wilmore and Mr Cohen had been together for 5 years when they married in 2012. Ms Wilmore works as an HR Director in the fashion industry and her ‘high paying job’ was the main source of income for the couple for most of their time together before they married.

In 2010, Mr Cohen started a property development business with a partner, which was ‘the first real venture’ that brought him ‘a good return’. Ms Wilmore supported Mr Cohen’s business venture initially by helping him to obtain two mortgages using her salary. Mr Cohen’s property business was profitable, and he was able to obtain mortgages for further properties for his business without help from Ms Wilmore, who did not share any of the profits derived from the sale of Mr Cohen’s business properties.

The subject matter of this appeal is concerned with the capital gains arising on the disposal of Thornfield Avenue (‘Thornfield’).

At the time Thornfield was purchased, the couple was living at Ravenshurst Avenue (‘Ravenshurst’), which was purchased in May 2009 with a deposit from both Ms Wilmore and Mr Cohen. The title of Ravenshurst was in Ms Wilmore’s sole name because it was her salary that allowed the mortgage to be obtained.

In or around April/May 2015, Ms Wilmore and Mr Cohen viewed Thornfield with the intention to purchase Thornfield to become their main residence. Thornfield was purchased jointly for a consideration of £541,100. The following financial arrangements took place in order to fund the purchase of Thornfield:

At the time of purchase, the plan was already afoot to carry out extensive renovations of Thornfield, which included a new loft, back and side extension and the entire interior and some of the exterior of the property. The renovations were anticipated to take around 12 months to complete. Mr Cohen was in the business of property development, and the renovation of Thornfield was his undertaking.

At the time when Thornfield was purchased, the marriage was already under much strain. Between April and July 2015, the couple went to marriage therapy for many weeks. In August 2015, the couple decided to separate. There are no children from the marriage.

On 10 September 2015 (as the date of separation stated in subsequent divorce proceedings), Mr Cohen moved into Thornfield which was still under renovation, and Ms Wilmore continued to live in Ravenshurst.

As soon as she could after Mr Cohen moved out, Ms Wilmore changed her mortgage on Ravenshurst back to a residential mortgage with a different bank, but date unspecified.

In December 2015, Ms Wilmore stopped contributing towards the mortgage payments for Thornfield.

In early October 2015, Ms Wilmore contacted Mishcon de Reya LLP (‘Mishcon’) for advice in bringing divorce proceedings. In December 2015, Ms Wilmore had her first meeting with Mishcon, spoke with a Ms Yorke, solicitor, with a view to instruct Mishcon to commence divorce proceedings. In this meeting, matrimonial properties were discussed. Ms Wilmore was able to indicate that she had agreed with Mr Cohen that he would ‘take Thornfield’ since he was already living there and ‘had invested all the money into it’, and that she would take Ravenshurst, given that she was living there and ‘paying the mortgage directly’.

Mr Cohen was not readily contactable during the months of December 2015 and January 2016 to move matters forward. In early February 2016, the couple reached an understanding as regards the division of assets which was outlined to Ms Yorke by Ms Wilmore in an email dated 2 February 2016. In this email, Ms Wilmore described what was ‘(sort of) agreement on things’ with Mr Cohen, and that ‘if possible we’d like that he gets the new house [i.e. Thornfield] and I stay in this one [i.e. Ravenshurst] although he may need to pay me something’. Ms Wilmore then made the following points:

Ms Wilmore continued in her 2 February 2016 email by stating:

By email dated 5 February 2016, Ms Yorke of Mishcon wrote to Ms Wilmore as follows:

By letter dated 10 March 2016, Ms Wilmore (as ‘[AW]’) replied to Ms Yorke’s (as ‘[MDR]’) six questions conveyed by email of 5 February, and in relation to Thornfield, the exchanges are as follows:

At some stage during the discussion of the terms for the Consent Order, a lump sum payment was being discussed. Ms Wilmore’s evidence is that:

By letter dated 4 April 2016 from MDR, Mr Cohen was notified and sent a draft petition for response. By letter dated 11 May 2016, Mr Cohen was informed that he should receive the sealed petition and notice of proceedings from the Court and to return the Acknowledgement of Service. The letter continued with the solicitor writing as follows:

By letter dated 16 June 2016, MDR wrote to Mr Cohen to advise that the lump sum would be amended to £35,000 and attached the Statement of information for a consent order in relation to a financial remedy signed by Ms Wilmore on the same date. The Statement was signed by Mr Cohen on 13 July 2016 (before the eventual disposal of Thornfield in September 2016).

On 9 September 2016, Thornfield was sold for £905,000. (The sales history from Land Registry records that the property was listed for sale in April 2016 for £925,000.)

The date of redemption of the Santander mortgage for Thornfield in joint names of Ms Wilmore and Mr Cohen was 9 September 2016.

Land Registry records confirmed the transferors of Thornfield on 9 September 2016 to be Mr Cohen and the appellant.

The lump sum order was stated at £35,000 in the Consent Order sealed by the Family Court sitting at Bury St Edmunds on 17 October 2016. The Order stated, inter alia, that:

The Consent Order confirmed that it was to take effect from the Decree Absolute, which was subsequently issued on 23 December 2016.

On 29 March 2017, HMRC wrote to Ms Wilmore in relation to her 2013-14 self-assessment return (‘SA return’) to consider a possible capital gain on the sale of a property at Prior Park Road. Further enquiries were made into properties on which Ms Wilmore had taken out a mortgage and subsequently sold, including (by then) Ravenshurst and Thornfield.

By letter dated 28 September 2020, HMRC set out their views on each of the three properties: (a) Ravenshurst was Ms Wilmore’s principal private residence and therefore no CGT arising; (b) Prior Park was accepted to be a property of which Ms Wilmore was not a beneficial owner, so no CGT accrued, and (c) that Ms Wilmore was liable to CGT as a joint owner of Thornfield upon its disposal, on the basis that there was ‘no formal transfer’ of her beneficial interest in Thornfield in the year of separation 2015-16 for s 58(1) TCGA to apply.

On 5 November 2020, HMRC raised a discovery assessment in relation to the CGT liability accruing to Ms Wilmore, and the relevant figures for the calculation are as follows:

In summary, the appellant’s case is that her beneficial interest in Thornfield was transferred to Mr Cohen before 5 April 2016, and as such, s 58 TCGA applies to treat the transfer on a no gain no loss basis. In that respect, Ms Lukashuk submits:

Finally, and on reflection, the appellant believes Mr Cohen may have persuaded (or duped) her to purchase Thornfield jointly as yet another property for him to develop for profit and as part of his ongoing business ventures rather than as a principal private residence. Even if Mr Cohen’s original intentions were sincere, it is evident that he used the property for development purposes after he and the appellant had separated and that he had full control over the works and ultimate sale.

HMRC’s case is that the appellant did not transfer her beneficial interest in Thornfield until after 5 April 2016, by which time she was already separated from Mr Cohen to enable the transfer to be deemed as on no gain no loss basis under s 58 TCGA. Mr Bradley submits that:

HMRC do not dispute that the couple separated on 10 September 2015, but any agreement reached between 10 September 2015 and 5 April 2016, whether verbal or written, was not legally binding and could have been varied at any time. It follows therefore that there as ‘no formal transfer of the appellant’s interest’ in Thornfield prior to 5 April 2016.

In the absence of any formal agreement, HRMC contend that any informal arrangement in respect of Thornfield could have been revoked or amended at any time, in a similar manner as to the reduction in the lump sum payment.

Section 53 of LPA and section 2 of LPMPA provide that a transfer of an interest in land and a contract for the sale of land must be in writing. The appellant has not provided any written evidence of the formal transfer of an interest in Thornfield or a contract for sale of such an interest during 2015-16 which would have complied with the legal requirements.

Existing documentary evidence, however, indicates that the appellant’s disposal of her interest in Thornfield took place in the year 5 April 2017 by reference to:

The appellant has not provided evidence to prove the contrary; the discovery assessment shall stand good in terms as provided under s 50 TMA.

In relation to the validity of the discovery assessment, HMRC bear the burden on the ‘competence’ and ‘time limit’ issues after the Upper Tribunal’s decision in Burgess & Brimheath Developments Limited v HMRC [2015] UKUT 578 (TCC). The appellant’s appeal, however, raises no challenge on the validity of the discovery assessment, and HMRC have not covered these issues in their submissions. The parties have made their respective case on the applicability of s 58 TCGA as the central issue in this appeal.

We have considered whether HMRC should be directed to make submissions on the competence and time limit issues. If we had not been able to determine the appeal on the substantive issue in favour of the appellant, we would have needed to be satisfied that HMRC have met the initial burden as respects the validity of the discovery assessment. For completeness, and in the event of an onward appeal by the respondents, we note here that we have not heard any submissions on the ‘competence’ and ‘time limit’ issues.

With reference to the parties’ submissions, the issue for determination in this appeal is whether Ms Wilmore’s beneficial interest in Thornfield was transferred to Mr Cohen by 5 April 2016 for s 58 TCGA to apply.

The term ‘interests in land’ pertains to both legal and equitable interests. However, there is a fundamental distinction between legal and equitable interests, in that legal interests in land are rights recognised by law while equitable interests in land are rights recognised in equity.

Legal rights are enforceable as of right, and once the existence of the right is established it is not really open to the court to consider the merits of the situation before giving a remedy. In contrast, a right recognised only in equity and not at law means that there is no absolute right to the protection by the courts of an equitable interest, and remedies to enforce equitable rights are at the discretion of the court.

In a standard land transaction (land and/or buildings) under English law, there are two stages: (i) the exchange of contracts wherein the parties enter into a contract for sale of the land; (ii) the completion, wherein the parties execute a deed to transfer ownership of the land from the vendor to the purchaser.

In relation to the first stage, where a contract exists for the conveyance of a legal estate, the law of equity recognises the contract as a contract for the disposition of the equitable interest in a legal estate. In terms of formality requirements for stage one, it is governed by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (as cited above) under the section heading of ‘Contracts for sale etc of land to be made by signed writing’.

The formality requirement for the second stage of a land transaction is governed by section 52 of LPA, and subsection 52(1) states: ‘All conveyances of land or any interest therein are void for the purposes of conveying or creating a legal estate unless made by deed.’ Section 53 LPA, to which HMRC’s submissions refer, requires the instruments to be in writing.

While no technical argument as a point of law has been advanced by either side as to the formality requirements for the transfer of equitable interests, pertinent to the appellant’s case is that equitable interests are incapable of being conveyed or created at law: sub-section 1(3) of LPA. As defined under subsections 1(1)(a) and (b) of LPA, the only estates capable of being conveyed or created in law are ‘legal estates’:

In most instances, the legal and equitable interests concur and are vested in the same person(s) over the same property. In other instances, where the legal and equitable interests are vested in different persons, a trust arises. The essential characteristic of a trust is the separation of the title to a property from the right to use and enjoy it. The trustee is the owner of the property by having the legal title, but he/she holds it not for own use, but for the beneficiary who has the right to use and enjoy the property. The right of the beneficiary is protected by equity and accordingly has an equitable interest in that property. This equitable interest is also referred to as ‘the beneficial interest’.

An express trust is created by a declaration and the instrument must be in writing, as stipulated under sub-section 53(1)(b) of the Law of Property Act 1925:

It is relevant to our consideration that an express trust is not the only form of trust recognised by the law of equity. A trust may still arise without being expressly created by an instrument in writing, but through recognition by the courts. The exact categorisation of trusts is complex, but in broad terms, trusts fall into three categories: (i) express trusts, (ii) non-express trusts, and (iii) statutory trusts. For non-express trusts, the encompassing term ‘implied trusts’ is often used to refer to trusts that have not been expressly created: see Cowcher v Cowcher [1972] 1 WLR 425 at p. 430. The types of implied trusts that the courts can give effect to are either a constructive trust, or a resulting trust.

For present purposes, we are concerned here with whether a constructive trust arose in the tax year 2015-16, whereby Ms Wilmore, having transferred her beneficial interest in Thornfield to Mr Cohen, became a trustee holding the legal title of Thornfield jointly with Mr Cohen until the eventual sale of Thornfield in September 2016.

A constructive trust arises by operation of law; that is to say, by the court recognising such a trust as being imposed by the law of equity on the owners of property, so that instead of enjoying the property as the beneficial owners, they are required by law to hold it, in whole or in part, for the benefit of some other person. Case law authorities on constructive trusts include:

With the legal principles and relevant provisions as regards different formality requirements pertaining to a transfer of legal interests and equitable interests in land, and from Ms Wilmore’s evidence and contemporaneous communications, we make the following findings of fact and inferences relevant to determining the appeal.

From our findings of fact, we conclude that by the agreement entered into by the separated couple in December 2015, Ms Wilmore in effect had transferred all her beneficial interest in Thornfield to Mr Cohen. From December 2015 onwards, a constructive trust arose whereby Ms Wilmore was the legal joint owner of Thornfield, but no longer held any beneficial interest in the property. In line with the relevant authorities, the species of constructive trust that arose in December 2015 was based on ‘common intention’ and ‘mutual understanding’, and was established by ‘the “agreement, arrangement or understanding” actually reached between the parties’ as in Yaxley v Gotts.

By virtue of the constructive trust that arose following the December 2015 agreement, there was a full disposal of Ms Wilmore’s beneficial interest in Thornfield to Mr Cohen. The disposal of Ms Wilmore’s beneficial interest in Thornfield therefore took place in the tax year ended 5 April 2016 for section 58 of TCGA to apply to deem the transfer as having been effected on a no gain no loss basis.

The appellant’s self-chosen term of ‘(sort of) agreement’ to characterise the December 2015 agreement does not detract from our conclusion that a constructive trust arose consequent upon the December 2015 agreement in relation to Ms Wilmore as the legal owner of Thornfield. The substance as related by Ms Wilmore in the ‘(sort of) agreement’ encompassed other aspects which were to form the divorce settlement, such as any potential claims on her pensions, or whether she could ‘get back’ her bonus. While the final details of the other aspects to form the divorce settlement were not set in stone in December 2015, the only relevant fact for the purpose of this appeal remained unchanged, namely that Mr Cohen had become the only holder of the beneficial interest of Thornfield, and Ms Wilmore had no beneficial interest in Thornfield and held only the legal title of Thornfield as a trustee jointly with Mr Cohen.

A consent order in a divorce petition as a procedural measure is to enable the parties to have a once-and-for-all agreement that cannot be varied by the parties, nor can the agreement be supplemented or diminished by the court. The essential purpose of a consent order is to achieve finality for the parties concerned in a divorce settlement. In the Privy Council’s decision in de Lasala v de Lasala [1980] AC 546 (which is relied on by HMRC), the wife’s application to the court for financial provision subsequent to new powers vested with the court was dismissed. Lord Diplock observed at 559:

The significance of Lasala is to establish that a party to a consent order cannot seek to re-open the provisions embodied in an order by the court, because the legal effect of those provisions is derived from the court order itself. The legal function of a consent order is therefore to enable the parties to an agreement to apply to the court to enforce the agreed terms, should that become necessary, without having to commence new proceedings.

It is important to appreciate that a consent order is always preceded by an agreement reached by the parties; the court does not make the agreement for the parties. No matter in what manner or pressure an agreement is reached between parties petitioning for divorce, there is an agreement reached by the parties behind a consent order. The ‘sanctity’ of agreements freely entered into between parties is fundamental in law.

In the present case, we find as a fact that by virtue of the agreement reached in December 2015 between Ms Wilmore and Mr Cohen so far as Thornfield was concerned, a constructive trust arose whereby Mr Cohen became the full beneficial owner of the property. We accept that as in December 2015, the parties had not finalised all the terms that came to be embodied in the Consent Order, but so far as Thornfield was concerned, the agreement gave rise to a constructive trust that was extant from December 2015 onwards until September 2016 when Thornfield was sold.

For this reason, we find that neither the timing of the Consent Order, nor the date of 31 August 2016 stipulated therein as the compliance date for the transfer of the respective properties, supplanted the date of the December 2015 agreement which gave rise to the constructive trust as the timing when Ms Wilmore transferred her beneficial interest of Thornfield to Mr Cohen.

We also reject HMRC’s submissions that the lump sum order and the variation of its quantum was indicative that there was no transfer of the equitable interest in Thornfield until after 5 April 2016. We find as a fact that the quantum of the lump sum order was in no way pitched as a payment to Ms Wilmore for transferring her equitable interest in Thornfield to Mr Cohen. We find the lump sum payment to be a ball-park figure towards recognising the greater financial contributions made by Ms Wilmore in the marriage over the years. While the timing of the lump sum payment might be predicated on the timing of the proceeds being available from the sale of Thornfield, the lump sum payment in itself was in no way tied to the transfer of Ms Wilmore’s equitable interest in Thornfield in December 2015.

For the reasons stated, the appeal is allowed. There was a transfer of the appellant’s beneficial interest in the relevant property in the tax year 2015-16 for section 58 of TCGA to apply to treat the transfer as on a no gain no loss basis.

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.