Where private residence relief (PRR) is available, it prevents a capital gains tax liability from arising on the sale of a home that has been the taxpayer’s only or main residence throughout their period of ownership. If the property has not been their only or main residence throughout, some of the gain may, subject to the availability of other reliefs, may fall into charge.
The relief extends not only to the `dwelling house’, but also to any land occupied and enjoyed with that residence as its garden or grounds up to the permitted area.
What counts as garden and grounds?
The legislation does not define what is meant by `garden and grounds’, and as such the words take their normal everyday meaning. In its Capital Gains manual (at CG64360) HMRC cites the following dictionary definition of `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’.
HMRC also notes that the word ‘grounds’ infers a larger area than that of a garden, and cites the following dictionary definition of `grounds’ in their manual:
`enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation’.
HMRC will generally accept that land surrounding a residence, which is in the same ownership as the residence, constitutes the grounds of the residence, unless at the date of disposal the land is being used for some other purpose, e.g. use as agricultural land, commercial woodlands, or land which is under development. Where this is the case, it is not regarded as part of the garden or grounds, and as such will not qualify for PRR.
However, PRR is not denied where the land in question has traditionally been enjoyed as the garden or grounds of the residence, but is overgrown or unused at the date of sale. Likewise, PRR will generally be available in respect of land that is used as a paddock or orchard, unless there is significant business use. Land within the grounds that has another building on it may also qualify for PRR, unless that building is used for business purposes or is let.
Different dates of acquisition
To qualify as the garden or grounds of a residence for PRR purposes, it is not a necessary condition that the land and the residence were acquired at the same time.
If the land was subsequently brought into use as a garden or grounds and remains in use for that purpose at the date of disposal, PRR may be available.
Land physically separated from residence
In the majority of cases, garden and grounds will surround the residence and be enclosed with it. For example, many traditional urban properties will have a back and a front garden, which will be sold with the property and which will qualify for PRR along with the house.
However, this does not mean that land cannot form the garden or grounds of a property if it is physically separated from it. Where it is possible to show that although physically separated from the residence, the land is naturally and traditionally the garden of the property and would normally be passed on as such on conveyance, PRR will normally be permitted in respect of the land as long as the residence qualifies for relief. This situation may be found in some villages, where it is the norm for the garden to be across the street from the house.
It should be noted that land will not automatically qualify for PRR if it is in the same ownership as the residence – for relief to be available, the land must be enjoyed with the residence as its garden or grounds. For example, an allotment or field owned separate from the residence, but with the same owner, would be unlikely to qualify for relief, even if the property in question lacked its own garden.
Permitted area
The amount of land which can benefit from PRR as `garden or grounds’ is not unlimited, and land falling within this definition will only qualify to the extent that it falls within the `permitted area’.
The legislation sets the permitted area as 0.5 hectares unless the area required for the reasonable enjoyment of the dwelling house as a residence, having regard to the size and character of the dwelling house, is larger than 0.5 hectares, in which case that larger area will form the permitted area. In this way, the legislation recognises what might be a reasonable garden for, say, a suburban semi is very different to the grounds that one might expect to surround a sizeable country house.
The acid test here is really whether the garden and grounds are appropriate to the size of the house if the area of the land in question exceeds 0.5 hectares.
Selling the garden separately
Whilst it may be more common for a house and the garden or grounds to be sold together, there will be many instances where this is not the case. For example, part of the garden may be sold while the house and the remainder of the garden are retained, or some of the land may be kept following the sale of the house.
Where some or all of the garden or grounds is sold separately to the residence to which it relates, the availability of PRR will depend on the circumstances.
Garden sold before house
For private residence relief to be available the land must, at the date of disposal, form part of the garden or grounds of a residence which is occupied as the taxpayer’s only or main residence.
This means that where PRR would be available on the sale of the property and some or all of the garden is sold off, but the property is retained as the main residence, the garden which is sold off first will generally qualify for PRR and any gain will be tax-free.
Example 1: Part disposal of garden
Arthur has lived in his house as his main residence for many years. The property is on a corner plot and enjoys a sizeable garden in keeping with the size of the property.
Arthur was a keen gardener, but when he finds the garden too much to manage, he sells part of it to a developer. He continues to live in the property as his main residence and enjoys the remainder of the garden with the property.
The sale of part of the garden qualifies for PRR, as he occupied the property as his only or main residence at the date of sale.
Sale of garden after sale of house
By contrast, if part of the garden or grounds is retained after the associated dwelling house is sold, the subsequent sale of the retained land will not qualify for PRR.
However, any garden or grounds sold at the same time as the residence will generally benefit from the relief.
Example 2: Sale of house but part of
its grounds retained
Helen lives in a country house, which has a traditional garden and a paddock. The grounds (including the paddock) are in keeping with the size and character of the house.
Helen sells the house and garden, but retains the paddock for a further year until she finds somewhere new to keep her horse.
The sale of the garden with the house will benefit from PRR. However, PRR is lost on the subsequent sale of the paddock (although relief would have been available had the paddock been sold either before the house or at the same time).
Importance of contract dates – disposal between contract and conveyance
The waters may be muddied somewhat if some or all of the garden or grounds are disposed of in a separate contract and the contract date is after that for the sale of the house but before the date of conveyance of the dwelling house (i.e. the completion date).
In this situation, HMRC accept that PRR is still available for the separate contract for the land. However, if the contract date for the land is after the date of conveyance of the main residence, the relief will be lost.
Practical Tip:
To retain PRR for the garden or grounds enjoyed with a main residence, they should be disposed of either before or at the same time as the main residence to which they belong.
