Selling The Garden – When Does Main Residence Relief Apply?

The demand for new homes has never been greater. Many homeowners with large gardens are selling part of their garden to property developers or indeed, building the properties themselves. Capital Gains Tax (CGT) will be the usual tax consideration, but in certain circumstances income tax may be charged.

If the land is not sold but the landowner undertakes the building himself, this is most likely to be deemed trading, even if the area being developed had previously been part of the garden attached to the main residence - building a house to sell generally amounts to trade. If trading, the building plot is deemed to have been converted from capital to ‘stock’ at market value as at the commencement of trade. As such, the ‘conversion’ will be subject to CGT (i.e. broadly market value less a proportion of the original cost of purchase relating to the garden), but invariably no tax will be due, being covered by principal private residence relief (PPR). The eventual sale of the new build property will be subject to income tax, the calculation being proceeds less value of the land introduced as ‘stock’ plus building costs, etc. 

Usually, the development is undertaken by a professional developer, the land having been sold to him by the original owner. As such, the sale will normally have CGT rather than income tax implications. However, PPR exemption may be possible (under TCGA 1992, ss 222-226 ’Relief on disposal of private residence‘). This relief exempts most owner-occupiers from tax, but it is only available when the sale is of a ‘dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence’ (s 222 (1)(a)), or the sale is of ‘land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area’ (s222 (1)(b)). Two phrases which need more investigation are ’garden and grounds’ and ’permitted area’.

It is a question of fact as to what constitutes ’garden and grounds’ and whether that land can be regarded as being used for the ’enjoyment’ of the residence; there is no legal definition of either.

HMRC guidance (in HS283 ’Private Residence Relief‘ stresses that the land being deemed a ’garden’ should serve ‘chiefly for ornament or recreation’. Land let or used for a business (e.g. farm land) is not a ’garden’ neither will land which has been ‘fenced or divided off from for development, or has been developed or is in the course of development (e.g. excavations under way for foundations, roads, services, and so on)’.

Experience suggests that the garden should be dedicated to plants or fruits and vegetables and purely used domestically. Having (for example) a beehive and selling the honey at the local shop, or letting a neighbour’s animals graze on the land for a fee, will give HMRC cause to deny the PPR claim as may the refusal of any kind of planning permission for the land.

This is defined as an area (inclusive of the site of the dwelling-house) of up to 0.5 of a hectare (i.e.1.23 acres). The area may be larger if, having regard ‘to the size and character of the dwelling-house, that larger area is required for the reasonable enjoyment of it as a residence’. This is an objective rather than a subjective test. The question to be asked is whether the house requires the land rather than whether the owner requires the land. In any such decision the role of the District Valuer is crucial. The Valuation Office Agency has its own method of determination, which can be found at section 8 of its Internal Guidance manual on Capital Gains Tax –’Determining the Permitted Area and the Amount of Relief’. http://app.voa.gov.uk/corporate/publications/Manuals/CapitalGainsTaxManual/sect8/b-cgt-man-s8.html#P75_1171

Date of sale conundrum

The legislation (in TCGA 1992, s 222(1)(b)) is written solely in the present tense, referring to land which the owner ‘has for his own occupation and enjoyment’. HMRC has taken that to mean that the exemption requires ‘ownership and occupation’ at the date of sale, and they have a strong case in favour of their contention in Varty v Lynes Ch D 1976, 51 TC 419. In that case, Mr Varty sold a house whilst retaining part of the garden, which was disposed of at a later date. The original sale of the house was exempt under PPR, but Mr Varty also tried to claim relief on the second sale as having been part of the main residence.

 

The court found that at the date of sale the land was no longer the ‘garden or grounds’ of the property, and therefore refused relief. The judge went on to suggest that exemption will automatically be lost in respect of the garden if the taxpayer ceases to occupy the house before it is sold. However, HMRC appreciates that this view is impractical, as confirmed in its Capital Gains manual at CG64381– ‘Private residence relief: garden and grounds: Varty v Lynes: not resident at date of disposal’. Sometimes an owner may need to move out of the main residence before he sells, which is why the legislation allows a period of 18 months between moving out and selling the property, without loss of the PPR; it would be unfair if this applied to the house and not the garden.

Therefore the order of sale is critical - land that is disposed of separately before the disposal of the residence may qualify for relief if the other relief conditions are fulfilled, but land sold separately after disposal of the residence will not qualify.

The First-tier Tribunal refused the claim, because the plot was uncultivated and was physically separated from plot four, on which the new main residence had been built. The fact that the land may have been part of the garden of the original house at some time was irrelevant.

Practical Tip:

It is notoriously difficult to succeed in a PPR ‘garden claim’ where the land is physically separated from the main residence, and therefore evidence (e.g. photographs) to support a claim will be crucial. As ever in this type of claim – each case must be taken on its merits.