Avalon was an alternate dimension created by Gallifreyan Interventionists. It existed in the unconscious mind of King Constantine, whose dreaming gave it substance. It was made for the Catuvelauni, a Celtic tribe, to escape Roman invaders. Also living in Avalon were the Fair Folk, Silurians who were unintentionally brought along with the Catuveluani.
The TARDIS hit a weak spot in 2012 between Avalon and England, causing its apparent destruction. The collision opened a rift between the dimensions. Before the rift was sealed, Avalon was where Compassion completed her transformation into a TARDIS. (PROSE: The Shadows of Avalon)