Avoiding the Residential Property Trap

The Town and Country Planning Act 1990 contains much that is of interest to developers.  Among its provisions is s91, which provides that as a general rule, consent lapses unless development is begun within three years of the date on which planning consent is granted.  Which of course begs the question – what is meant by the commencement of development?

The question is answered by s56 of the Act.  This provides that development is to be taken as beginning on the earliest date on which “any material operation comprised in the development begins to be carried out”.  And “material operation” is in turn defined to include, principally:

  • any work of construction in the course of the erection (which includes extension or alteration) of a building;
  • any work of demolition of a building;
  • the digging of a trench which is to contain the foundations of a building;
  • laying of any underground main or pipe to the foundations of a building (or to a trench as aforementioned);
  • laying out or constructing a road.

You may wonder what all this has to do with tax.  Patience.

Higher rates of Stamp Duty Land Tax (“SDLT”) are charged on residential than on commercial property.  And a higher rate of Capital Gains Tax (“CGT”) is charged on “residential property gains” than on most other gains.

The definitions of “residential property” for the two taxes are not in completely identical terms (that would make life far too straightforward).  One of the subtle differences is that for CGT purposes (but not for SDLT purposes) land is “residential property” if there has been a “dwelling” on it at any time in your period of ownership.

Subject to that special rule for CGT, bare land (regardless of whether it has consent for residential development) doesn’t attract the higher rates of tax.  It’s the presence on the land at the time of sale of a “dwelling” that counts.  So, demolishing a house and selling bare land may save your buyer SDLT, although it won’t affect your CGT bill.

This invites the question – what is a dwelling?  Broadly the same definition applies for both taxes – a building counts as a “dwelling” if any of the following applies:

  • it is used as a dwelling;
  • it is suitable for use as a dwelling;
  • it is in the process of being constructed or adapted for such use.

HMRC say, in relation to SDLT, that: “Undeveloped land is essentially non-residential but may be residential property if, at the effective date, a residential building is being built on it.”  One may assume that the same rule would be applied to CGT.  That’s probably right: although it’s stretching a point as a matter of language, the courts would probably regard a hole in the ground into which you intend to lay foundations as a “building in the process of being constructed”.

Similarly, in relation to conversion, HMRC say that: “Where, at the effective date, an existing building is being adapted or marketed for, or restored to, domestic use, it is treated as residential property.”  Clearly if the building is in the process of being adapted for domestic use, that is correct: but merely marketing it as being suitable for adaptation by the purchaser is not.

Which brings us back to the question – at what point does “commencement of development” bring a dwelling (as defined for tax purposes) into existence and thus turn bare land (or commercial property) into residential property?  Or to put it another way – are there things which you can do which count as “commencement of development” so as to keep planning consent alive but which do not bring a dwelling into existence?

Looking back at the definition of “material development” and comparing with the definition of a dwelling, it’s difficult to see what scope there might be.  Difficult, but not impossible.  Possibly, laying drains intended to serve more than one property might be considered to be material development but might not result in a building which was “in the process of being constructed”.  And in the planning case of Malvern Hills District Council v Secretary of State and Robert Barnes Ltd [1982] JPL 439; (1983) 46 P & CR 58; 81 LGR 13, it was held that marking out the line and width of a proposed road was sufficient to constitute “material development”, so in appropriate cases this might offer a more certain route of securing “material development” without starting the construction or adaptation of any building.

The point is this: if there is a delay between getting planning consent and sale, it may be necessary to “commence development” in order to preserve the validity of the consent.  Great care should be taken to ensure, if at all possible (which may not always be the case), that any commencement of development does not convert what is being sold to residential property for the purposes of CGT and SDLT.

We are not, of course, experts on planning law or on the Town and Country Planning Act 1990: you should take advice on these aspects from those who are.  But in doing so, do not overlook the taxation consequences, which may be very significant. For more information about how our property tax experts can help you, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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