Selling Land And Gardens Separately: Does The Order Matter?

Sarah Bradford explains that when part of the garden is sold separately from the house the order in which they are sold matters.

Private residence relief acts to exempt any gain arising on the sale of the ‘dwelling house’ from capital gains tax where the dwelling house has been the taxpayer’s only or main residence throughout the period of ownership. 

Where the property has been the only or main residence for some but not all the period of ownership, private residence relief applies to shelter the period for which it was so occupied, plus the final 18 months of ownership, regardless of whether the property was the taxpayer’s only or main residence at that time. 

The relief applies to both the dwelling house itself, and also to land used by the taxpayer ‘for his own enjoyment with that residence as its garden or grounds up to the permitted area’ (TCGA 1992, s 222(1)(b)).

Although the tax legislation provides for private residence relief to extend to ‘garden or grounds’ enjoyed with the residence, there is no statutory definition of the phrase, which therefore takes its everyday meaning. Guidance as to what HMRC understand by ‘garden or grounds’ can be found in their Capital Gains Tax manual at CG64360, where they reproduce a dictionary definition of ‘garden’ as being:

‘a piece of land, usually partly grassed and adjoining a private house, used for growing flowers, fruit or vegetables, and as a place of recreation’.

The word ‘grounds’ suggests a larger area than a garden; the dictionary definition reproduced at CG64360 is:

‘enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation’.

HMRC staff are instructed to accept that land surrounding a residence and in the same ownership is the grounds of the residence, unless it is used for some other purpose. They further instruct that land should not be excluded from the garden and grounds where:

If the land was acquired at a different date to the residence, this does not preclude it being a residence – HMRC will accept that the land constitutes garden or grounds provided that it was subsequently brought into use as such and remains as garden or grounds at the date of disposal. 

Private residence relief extends to the garden and grounds of a person’s residence up to the permitted area. The ‘permitted area’ is 0.5 of a hectare (TCGA 1992, s 222(2)) and includes the land on which the residence stands. However, the legislation further provides that where the area required for the reasonable enjoyment of the dwelling house having regard to the size and character of the dwelling house is larger than 0.5 of a hectare, the larger area is the permitted area. 

In determining whether the permitted area is more than 0.5 hectares, consideration is given to the size of grounds needed for the ‘reasonable enjoyment’ of the property. 

This was considered in Longson v Baker ChD 2000, 73 TC 415, in which the taxpayer claimed that land in excess of 0.5 hectares which was used to house and graze horses was required for the reasonable enjoyment of the house. The land, comprising 7.57 hectares, was purchased with the house. The District Valuer found the permitted area to be 1.054 hectares – the test being what was required for the reasonable enjoyment of the dwelling house having regard to its size and character, not what was required by the particular owner. 

Where the grounds exceed the permitted area, it is also important to establish what land falls within the permitted area and what land falls outside. This can be particularly important where the land is not all of equal value, for example where some of the land has development potential and planning permission and some does not. 

Where the land exceeds the permitted area, the part that is treated as the permitted area is the part deemed most suitable for the occupation and enjoyment of the residence (TCGA 1992, s 222(4)).

The extent to which private residence relief is available for the garden and grounds depends on whether:

House and garden sold together and garden within the permitted area

This is the most straightforward case into which most residential house sales fall. Private residence relief is available if the house and garden or grounds are disposed of together and the garden or grounds do not exceed the permitted area.

House and garden sold together, but garden exceeds the permitted area

Where the garden or grounds of the house are sold with it, but their size is such that it exceeds the permitted area for the house, the grounds falling outside the permitted area will not benefit from private residence relief. 

Any gain arising on sale must be split between that relating to the dwelling house and permitted area and that relating to land outside the permitted area.

More than one disposal of the garden or grounds

It may be beneficial to sell off part of the garden, particularly where the land has development potential. This may be very lucrative and worth losing part of the garden for.

The fact that part of the garden is being sold separately from the house does not preclude the availability of private residence relief, as long as the garden or grounds that are sold are within the permitted area for the residence and are still used as garden and grounds for the enjoyment of the residence at the date of sale. 

Where the garden is sold in several parcels, it is necessary to determine the permitted area separately for each disposal. The whole of the permitted area for each disposal qualifies for private residence relief.

The key feature here in preserving relief is that the dwelling to which grounds belong is still owned at the time that each parcel of land is sold – the garden and grounds only qualify for relief by virtue of being enjoyed with the house. A dangerous mistake is to sell the house and part of the garden first, retaining some of the land, and selling that land subsequently; any land sold after the dwelling house does not qualify for PPR, even if for most of the period of ownership it was enjoyed with the house.

The leading case on this point is Varty v Lynes ChD 1976, 51 TC 419. Mr Lynes disposed of a dwelling house retaining the garden, which he disposed of at a later date. The High Court held that no relief was due on the disposal of the land because the legislative test was applied at the date of the disposal of the retained land. At the time the land was disposed of, it no longer formed part of the garden and grounds of the house; it did not matter that historically it had done so. There is no time apportionment here. 

Consequently, for private residence relief to be available for garden and grounds, the land must be held together with the residence at the date of disposal. Land disposed of separately before the house will qualify for relief as long as the other conditions are met; however, relief is denied where the land is sold separately after the house.

When selling part of the land or grounds separately from the house (e.g. to a developer), make sure that the land is sold while the house is still owned to preserve private residence relief.