Sarah Bradford looks at capital gains tax private residence relief and the extent to which it applies to gardens and grounds.
Most people assume that if they make a gain on the sale of their main residence, there will be no capital gains tax to pay. However, that is not a given.
Where a taxpayer has more than one property, only one can be the main residence at any given time. Furthermore, a property can only be considered as a main residence if it is lived in as such. A married couple and civil partners can only have one main residence between them.
Even where a property has been used as a main residence, the whole property will not always qualify for the relief. For example, if part of the property is used exclusively for business purposes, any gain relating to that part is taxable. Problems may also arise where the property has extensive gardens or grounds, as the totality of the gardens and grounds will not necessarily form part of the main residence and qualify for the relief.
What counts as ‘garden or grounds’?
There is no statutory definition of garden or grounds, so they take their everyday meanings, with the word ‘grounds’ inferring a larger area than ‘garden’. HMRC’s guidance refers to the following dictionary definition:
- Garden: a piece of ground, usually partly grassed and adjoining a private house, used for growing flowers, fruit or vegetables, and as a place of recreation.
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Grounds: enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation.
The default position is that land surrounding a residence which is in the same ownership is the grounds of the residence unless it is in use for some other purpose. Whilst land that is used for some other purpose at the date of disposal (e.g. land used for woodland or agriculture) will not be treated as part of the grounds, the following will not necessarily be excluded:
- land which has traditionally been the garden or grounds, but which is unused and overgrown at the date of sale;
- paddocks or orchards, provided there is no significant business use;
- land that has a building on it, unless that building is in use or let.
If the land was acquired on a different date, HMRC will accept that it forms part of the garden or grounds if it was subsequently brought into use as the garden or grounds of the residence and remains so at the date of disposal. It should also be noted that the land does not have to be used exclusively for recreational use; the owner of a guest house may allow guests to use the garden, but it may still qualify for relief if the other tests are met.
Land physically separated from the residence by other land will not usually form part of the grounds; but there may be exceptions (e.g. cottages where the garden has traditionally been across the street). However, simply buying a separate plot of land to cultivate because the garden is small will not bring it within the ambit of the relief.
The ‘permitted area’
The relief on the sale of the main residence extends to gain that is attributable to the dwelling house or the part of the dwelling house that has been enjoyed as the main residence or land enjoyed and occupied by the taxpayer with that residence up to the permitted area.
The legislation defines the ‘permitted area’ as an area of 0.5 of a hectare (i.e. 1.23 acres) including the land occupied by the dwelling house. Thus where the garden and grounds are not more than 0.5 of a hectare, as long as the conditions for the relief are met, the whole area automatically qualifies for relief.
However, the land must comprise the gardens and grounds of the residence; land which does not form the garden and grounds does not qualify for the relief, even if the total amount of land disposed of with the residence is not more than half a hectare. The test is house and garden up to 0.5 hectares, not the first 0.5 hectares of land.
A larger permitted area
The quantitative test of the permitted area is subject to the caveat that where the area required for the reasonable enjoyment of the dwelling house (or the part which is being disposed of) having regard to the size and character of the dwelling is larger than 0.5 of a hectare, that larger area is taken as the permitted area and is eligible for main residence relief. HMRC’s Valuation Office Agency is responsible for determining the size of the permitted area, and will take into account:
- the size and character of the dwelling house;
- the part of the dwelling house that has been used as the owner’s residence; and
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the amount of land that is required for the reasonable enjoyment of the residence.
As a general rule, urban gardens are smaller than those of homes in rural areas; what might be reasonable for a rural property may be regarded as large for a property of the same size in an urban setting.
There have been a number of cases regarding the determination of the permitted area. The case of Longston v Baker ChD 2000, 73 TC 415 concerned an equestrian property. The taxpayer claimed that land of more than 0.5 of a hectare was required for the reasonable enjoyment of the property, arguing that all of the land purchased with the property, comprising 7.56 hectares (18.68 acres) was required by virtue of the equestrian nature of the property. By contrast, the District Valuer, while agreeing that the permitted area should be more than 0.5 of a hectare, suggested that an area of 1.054 hectares (2.61 acres) was reasonably required for the enjoyment of the house.
The Court found against the taxpayer. The test is an objective test as to what is reasonably required for the enjoyment of the residence, rather than a subjective test of what the taxpayer may like to have in order to use the residence in a particular way.
Which part counts?
Where the garden and grounds are in excess of the permitted area, the part treated as the permitted area is that part which is most suitable for occupation and enjoyment of the residence. In a case where not all the grounds are of equal value, the location of the permitted area can be very important.
An example where this would be the case is if some of the land had development value and some did not. Land sold with planning permission would be more valuable than land sold without it, and the relief would obviously be greater if the permitted area comprised the land with development value. However, the taxpayer does not to choose what land falls within the permitted area on the basis of whichever gives the best result from a tax perspective (i.e. maximum relief and minimum chargeable gain). Rather, the decision falls to the District Valuer, although the taxpayer has the right to appeal the decision.
More than one disposal
The dwelling house and the garden and grounds may not always be disposed of in their entirety in a single sale. Part of the land may be sold before the house, or the house and some of the grounds may be sold while some of the land is retained, which is then sold later.
However, where disposals occur over a period of time, the permitted area may change (e.g. due to a change in the size or character of the dwelling, or as a result of the trend towards smaller gardens). Care should be taken when selling some of the land separately and retaining the dwelling, as HMRC may argue that the land sold was not required for the reasonable enjoyment of the property. This argument could be countered where the sale was for financial reasons or where the disposal was within the family.
Land sold after the disposal of the residence will not qualify for main residence relief, as at the date of disposal the land is not held with the residence as its garden or grounds; the test applies at the date of disposal, rather than over the period of ownership as a whole.
Practical tip
Where the grounds are in excess of 0.5 of a hectare, retain evidence to show how they were used with the residence for recreation and enjoyment (if applicable).
