Developing The Garden – When Can PPR Apply?

Julie Butler considers the scope within the capital gains tax legislation for principal private residence relief in respect of the garden.

With development values returning, many homeowners are looking to make tax-free gains on the development of their gardens where possible. 

The important tax relief available to many homeowners in respect of their home and garden is that for a principal private residence (PPR) (TCGA 1992, s 222). The relief applies to a gain arising on the disposal of the dwelling-house or its garden and grounds. In the case of the latter, relief is restricted to 0.5 of a hectare (inclusive of the site of the dwelling-house) or such larger areas as is required for the reasonable enjoyment of the dwelling-house having regard to its size and character (TCGA 1992, s 222(2), (3)). The garden and grounds have to be for the owner’s occupation and enjoyment, and there are other tax considerations to consider.

HM Revenue & Customs (HMRC) are very aware of the development value of gardens and grounds in the same way that the taxpayer is very keen to try and maximise the tax reliefs. The historical approach of HMRC challenging the development of gardens is clearly shown in the case Varty v Lynes [1976] STC 508. In that case, exemption was denied where the land was sold nearly a year after the house, because it was no longer occupied and enjoyed with the residence. 

It is essential that the garden and grounds must be occupied and enjoyed with the residence at the time they are sold. The relevant legislation (TCGA 1992, s 222(1)(b)) is concerned with the present time, which should be contrasted with s 222(1)(a), which concerns itself with the past tense. It is not sufficient that the garden and grounds have been occupied and enjoyed with the residence at some time during the period of ownership. 

Land will be excluded from garden and grounds if used for an agricultural or other business purpose, since they would not be chiefly recreational or not occupied and enjoyed with the residence. Land fenced off from the residence to be sold for development is also excluded.

What is the permitted area? It is generally accepted that this is probably the most contentious area of tax claims by the taxpayer. If the garden and grounds do not exceed 0.5 of a hectare, which includes the site of the dwelling-house, relief for the whole of the garden or grounds is given automatically. This will include the buildings situated on the relevant land provided that they are not used for business purposes or let out. If the garden and grounds exceed 0.5 of a hectare, relief will only be available for a larger area if that area is required for the reasonable enjoyment of the dwelling-house, having regard to the size and character of the dwelling-house.

When a landowner has development opportunities on land which is situated very close to the PPR, part of the planning advice can be to make sure that maximum use is made of the PPR as far as it relates to the garden and grounds. Some tax practitioners would take this as far as to see development opportunities a long way in advance and to ensure all the planning potential of the garden and grounds is achieved. For example, it has been known for hedges to be planted (usually of the fast-growing fir tree type) and for greater emphasis to be placed on recreational garden space than paddock land.

It is important to remember the objective nature of this ‘test’. The commentary from the Special Commissioner includes:

‘I am not permitted to take account of the particular requirements of the owner of the dwelling…it is the house to which I must look and not the wishes, desires or intentions of any particular owner’, and 

‘It does not follow that open space is required for the amenity of the house.’

An active ‘used’ garden complementing the house must be shown – in simple terms, shrubs, a place to sit and enjoy the external of the house, etc.  

Planning opportunities can arise over the fact that the dwelling-house can comprise more than one building, as seen in Batey v Wakefield [1980] STC 572, and when determining whether additional garden and grounds in excess of 0.5 of a hectare is required for reasonable enjoyment it is important to note that larger houses tend to require larger grounds, and therefore greater opportunities exist.

It is an interesting tax planning point that, when advising clients on their ability to claim PPR relief for the grounds, they should look at conveyance documents which may have set some form of precedent. Another source of reference for looking at PPR relief is found in the Valuation Office manual (in Section 8 ‘Principal Private Residence Relief’, Part 4, at para 8.43). This gives an indication on how the District Valuer will approach the objective test:

‘In considering the area ‘required’, the most obvious evidence to consider is the extent of the gardens/grounds enjoyed with houses of similar size and character in the locality. Evidence of sale prices is immaterial and should not be used. The extent of the locality will for this purpose depend upon the proximity of sufficient comparables to obtain a fair impression. It may be necessary to bear in mind:

(i) that there is a general tendency towards smaller gardens because of cost, convenience, lack of gardeners etc, and 

(ii) that houses in urban localities are generally found to have smaller gardens/grounds than in rural districts.

It follows that houses which were built many years ago and/or are in districts which were once rural, but now urban, may no longer strictly require the area of garden/grounds which they retain. The lower end of the range of areas of garden/grounds occupied with comparable dwellings is evidence of requirement. Larger areas are often accounted for by historic reasons, or the owner’s caprice. It should be sufficient to show that there are some closely comparable houses with 0.5 of a hectare or less. No value based test should be used.’

One of the most important cases in this respect is set out in Longson v Baker [2000] STC (SCD) 244. This case gave a ruling of great importance for landowners looking to dispose of the PPR and the surrounding ground.

In this case, the taxpayer claimed that the permitted area (which included a farmhouse, stables and an outhouse all facing a central courtyard) amounted to 7.56 hectares. The claim failed despite the parties agreeing that the stables accommodating 12 horses were part of the dwelling. The Inspector contended that ‘required’ meant close to necessary. The permitted area was reduced to 1.054 hectares.

In the case of Longson v Baker, the question must be asked as to what alternative advice could have been given? The stable size was large. What would the chances have been of claiming entrepreneurs’ relief on the gain? What business activity or potential for business activity was there?

No taxpayer can claim exemption on more than one house. If a taxpayer owns more than one (e.g. a country and a town house) he can elect within two years of the date of acquiring the second house which of them is to be his PPR for CGT purposes. If he fails to elect, the issue becomes one of fact for the self-assessment return. No election is required where one of the properties is not owned but merely occupied under licence as, for example, job-related accommodation under a service occupancy. 

There are tax planning opportunities around two properties and which garden is the most valuable.