Replies to queries - Interests in land

Interests in land

Two of our farming clients have recently disposed of rights retained over farmland that they had previously disposed of.
Farmer A disposed of a large area of farmland abutting his farmhouse. The conveyance did not cross-refer to the restrictive covenant given on the same day that no building should take place on nearby land. Counsel considers that because the covenant was negative in nature and substance, was given for the benefit of the farmhouse and is binding in equity, it is impliedly (under Law of Property Act 1925, s 78) an interest in land and, by extension, part and parcel of the client's main residence, so that TCGA 1992, s 222 applies to the monies paid for the recent release of the covenant. Farmer B owned land adjoining a commercial development, which he sold to the developers who were considering an extension to their premises. The sale contract was conditional on the execution of a deed securing a further payment if residential housing was built on the land. The client was advised that capital gains tax roll-over relief would be available. Commercial building never occurred and my client continued to occupy the land under licence, without payment. There was a subsequent sale of the land for housing and a payment was made under the deed.
The Revenue's attention has been drawn first of all to TCGA 1992, s 152 which refers to an interest in assets used and used only for the purposes of the trade. The Revenue's attention has also been referred to the Interpretation Act 1978, Sch 1, which defines the word land as including 'interest, easement, servitude or right in or over land'.
Readers' comments are welcomed on the following points.

• Is it agreed that the restrictive covenant in (A) and the deed securing further payment for housing development in (B) are both interests in land?
• Is it agreed that if an interest is a chose in action, it cannot be, at the same time, an interest in land for rollover relief, as the Revenue argues (Marren v Ingles).

Any other comments would also be gratefully received.
Query T16,611                                              — Landed.

For Farmer A, whose restrictive covenant is an interest in land, the question that arises is whether it is an interest in his residence or whether it is an interest in the land that he has sold, which, by virtue of TCGA 1992, s 222(1)(b), is not land that he has for his '…own occupation…' at the time of the release of the covenant. If the latter is argued then reference should be made to the Capital Gains Manual at paragraph CG64604 which makes clear that HMRC regard it as an interest in the residence. Thus relief under s 222 should apply to the release of the covenant, subject to normal conditions.
The circumstances of Farmer B's case are not clear in several respects.
If the execution of the deed was precedent to legal liability under the contract, then the contract would be conditional within TCGA 1992, s 28. That section will determine the date of disposal of the adjoining land. What matters is whether, at the capital gains tax date of disposal of the adjoining land as determined by s 28, the further sums under the deed were ascertainable in amount. If they were, then TCGA 1992, s 48 would apply and the further sums would form part of the consideration for the sale of the land (without discount for any contingency or postponement). Accordingly, the whole consideration would then be in respect of land for roll-over relief purposes. More likely, however, is that the sums under the deed would have been unascertainable because events that established the amount payable under the deed would occur after the date of disposal of the land. In that case, Marren v Ingles [1980] STC 500 would be the authority and the value of the future rights (a chose in action) under the deed would need to be valued and included within the disposal consideration for the land, but any further sums received after the date of the disposal are attributed to the chose in action (and would not qualify for roll-over relief). However, where the sums actually received under the deed are less than the value attributed to the chose in action at the date of disposal of the land (which might be the case here), and if this occurred on or after 10 April 2003, an election is possible (under TCGA 1992, s 279A) to set the loss arising on the chose in action against the gain arising on the land. The continued occupation of the land by Farmer B after its sale under a licence would not amount to an interest in land and it is agreed that the chose in action itself cannot be an interest in land, hence the further sums received are not in respect of any interest in land and cannot qualify for roll-over relief.                                — Television Man.

HMRC accept that the release of a restrictive covenant over land adjoining a principal private residence is within the scope of the relief for the latter because it amounts to an interest in the latter: see Capital Gains Manual at CG64604.
An overage arrangement would not necessarily be treated in the same way, even if protected by a restrictive covenant (and the method chosen for protecting the vendor against default has not been disclosed). While, on the face of it, it might be a second instalment of the proceeds of sale for the land sold, such a construction would almost certainly not have been advanced at the time of the original disposal because TCGA 1992, s 48 would then be in point. The only alternative would be to invoke Marren v Ingles [1980] STC 500 at that time, and in that event the earn-out takes the form of the disposal of a new non-land asset.
It follows that the roll-over provisions should not be in point in relation to the receipt of the housing value uplift consideration, not least because the initial open market value of the contingency would have been taken into account in arriving at the disposal value for the land at stage one.
But there may be an additional difficulty, namely that, although TCGA 1992, s 152 refers to 'an interest' in the old assets, this has to be read in the context of TCGA 1992, s 155, which relates to physical assets. The former requires 'use' of that asset throughout the period of ownership. Ownership of all land in England is vested in the Crown and so the use of the concept of 'interest' in it was a pre-requisite to the roll-over code being capable of operation at all. But it does not follow from this that s 152 is capable of applying to land occupied under an unrelated licence over which a contingent right to payment for the housing value uplift had been protected by a conveyancing device which took one of the following forms:

• a restrictive covenant in favour of adjoining land;
• a right of re-entry under Law of Property Act 1925,
  s 7(1); or
• a mortgage.

Only if the right retained had taken the form of granting only a long lease at stage one or, even though the freehold of the site was transferred, there had been the reservation of a ransom strip or airspace, would there have been a second transaction involving a disposal of land.   

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