Meg Saksida explains the area of land considered as 'garden and grounds' for capital gains tax main residence relief and when this can be challenged.
It has never been the intention of the Treasury to impose a tax charge on a gain made by an individual selling their family home. The logic behind this is that everyone must live somewhere and if, on the disposal of the main residence, there is a gain (in the absence of any trading), this is simply a happy consequence.
However, there is a capital gains tax (CGT) charge on gains made on the disposal of fields, pony paddocks, pasture and other land. The question, therefore, arises: where do the grounds of a property end, and a field or other kind of land begin? What exactly are 'garden and grounds', and how large are they able to be and still achieve main residence relief for the owner?
Definition of ‘garden and grounds’
In HMRC's internal manual, they explain that although ‘garden and grounds’ are not defined in the legislation, they consider that they should be given their 'everyday meaning'. For gardens, this is ‘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’. For grounds, which are assumed to cover a larger area than gardens, this is ‘enclosed land surrounding or attached to a dwelling-house or other building serving chiefly for ornament or recreation.’
However, these definitions do not give any degree of scale, but the legislation makes it very clear that this land which has been used for the garden and grounds is only exempt up to the 'permitted area'.
Definition of the ‘permitted area’
The main residence relief legislation (at TCGA 1992, s 222) defines the permitted area as an expanse (including the residence) of half a hectare which is around 1.24 acres. At first glance, this appears quite fixed and straightforward, but this is subject to a further provision which dictates that the permitted area can be larger than half a hectare if the commissioners consider that a larger area is required for the ‘reasonable enjoyment of it as a residence’.
In summary, then, the permitted area is half a hectare unless you can justify that you need more garden and grounds to enjoy the home.
Case law
Which arguments then justify the additional acreage? Turning to case law, probably the most important historic case is Longson v Baker [2001] 115 (TC). The taxpayer had 7.56 hectares of land on which sat a farmhouse, stables and an outhouse. The family loved horses and, during their period of ownership, added a riding school. When the property was disposed of, the taxpayer felt that it was reasonable to include the riding school in the main residence as, for their family, the equestrian interests were vital to their enjoyment of the residence. It was, however, held that the test of reasonable enjoyment was an objective one, not a subjective one. For most homeowners, it is not required to keep a riding school at a property to enjoy a residence.
The district valuer in the case had further made reference to a much earlier case, Newhill Compulsory Purchase Order 1937, in which the judge had further explained the word 'required' with the following reflection "…it is pleasant, and one may say, both an amenity and a convenience to have a good deal of open space around one's house, but it does not follow that that open space is required for the amenity or the convenience of the house. 'Required', I think in this section, does not mean merely that the occupiers of the house would like to have it or that they would miss it if they lost it, or that anyone proposing to buy the house would think less of the house without it than he [sic] would if it were preserved to it. 'Required' means, I suppose, that without it there will be such a substantial deprivation of amenities or convenience that a real injury will be done to the property owner and a question like that is obviously a question of fact."
In Ritchie v HMRC [2017] 449 (TC), the word 'required' was again analysed. The Ritchies had 0.7 of a hectare and wished to include their shed on the outskirts of the property in their main residence for their private residence relief claim. Although it was held that the shed was a part of the dwelling house, it was not held to be within the permitted area. The First-tier Tribunal (FTT) concluded that the land the shed was on must have been required for the enjoyment of the residence, not just that it was desirable to have been.
Philipps v HMRC [2020] 381 [TC]
The latest case on this issue was heard by the FTT in late 2020. Mr and Mrs Phillips had purchased their home in 2007. It was a substantial property with five bedrooms, a swimming pool, a three-car garage and an outbuilding of a one-bedroom cottage. The property sat on grounds in excess of the permitted area, measuring around 0.94 hectares (2.3 acres). When the couple disposed of the property (having not declared the sale believing that the gain was covered by principal private residence relief), HMRC investigated. HMRC's position was clear, in that the grounds in excess of half a hectare were not required for the enjoyment of the property, and the gain apportioned to this part of the estate would be chargeable. To this end, they issued a discovery assessment to the couple for unpaid CGT of around £163,000.
Mr and Mrs Phillips appealed against the assessment and argued that, on the contrary, the additional land was indeed required for the enjoyment of the residence.
In past cases (in justifying that land was not required for the reasonable enjoyment of the property), HMRC had relied on comparing similar houses in the vicinity as to their gardens and grounds. The Phillips did just this, employing a local chartered surveyor with over 50 years' experience. The FTT then analysed these neighbouring properties, including the size of the houses, the size of the gardens, the value of the properties and their relative location. They found that, as the house was large and situated in a quite rural area, it would be likely to be a very desirable house to anyone wishing to have privacy and space. The lack of privacy and space would, therefore, have been such a substantial deprivation that a real injury would have been made to any homeowner of the property without it. The Phillips won.
Practical tip
Many factors will need to be considered in justifying a requirement for more than the statutory half a hectare. In all cases, taxpayers are advised to consider: firstly, that the land is an objective requirement for enjoyment, not a subjective one; that it is actually required and not just desired, and that a strong, firm case can be made, employing credible, well qualified and experienced professionals, to justify the excess.
