Private residence relief for gardens and subsidiary buildings
Private residence relief recap
The starting point for advising your client is s.222 Taxation of Chargeable Gains Act 1992 (TCGA). The first part states that private residence relief (PRR) applies to a gain accruing to an individual which is attributable to the disposal of:
- a dwelling-house which has been the only or main residence; or
- land which has been occupied and enjoyed with the residence as its garden or grounds up to the “permitted area”.
The first thing to note is that land accompanying a property that is disposed of can qualify for PRR . This is reasonable, otherwise everyone who sold a property with a garden would need to apportion the gain. However, it is clear from the legislation that the application of PRR to accompanying land is restricted. For our purposes, we will assume that the availability of relief on the residence itself is not in question, and so we are purely looking at the accompanying land and buildings.
HMRC’s view and definitions
A key factor for HMRC is whether the land is being used as a garden or grounds at the date of disposal, and various cases have upheld this. The term “garden” is taken to mean an enclosed piece of ground devoted to the cultivation of flowers, fruit or vegetables. This would be restrictive, but where land is not used for these purposes, consideration can be given to the wider term “grounds”, meaning enclosed land surrounding or attached to a dwelling-house serving chiefly for ornament or recreation. HMRC will generally accept that land surrounding the residence that is in common ownership will make up the grounds, unless it is used for another purpose.
Practice point. In particular, any land that has been used for agricultural or other business purposes is likely to see a claim for PRR challenged.
The permitted area
For these purposes, the “permitted area” is defined in s.222(2) as an area of up to 0.5 hectares, i.e. 5,000 square metres. If the garden and grounds do not exceed that threshold, full relief is automatic. It would appear that this may present a problem for your client, as she has described the grounds that the property is set in as “substantial”.
Practice point. The permitted 0.5 hectares is taken to include the area occupied by the residence, not in addition to it.
The next step is to consider s.222(3), which says the permitted area may be larger than 0.5 hectares (the “larger area”) if it is required for the “reasonable enjoyment” of the dwelling-house as a residence, having regard to its size and character.
Essentially, it’s reasonable for larger properties to be set in more than 0.5 hectares of grounds and still qualify for PRR. For example, a nine-bedroom country house is far more likely to be accepted as needing, say, three hectares to meet the “reasonable enjoyment” test than a two-bedroom cottage. However, there is nothing in the tax legislation that gives any rule of thumb, and you will very much need to adopt a common sense approach.
Practice point. If it is clear that all the grounds are not required for “reasonable enjoyment”, some apportionment will be needed. However, this does not mean that an area larger than 0.5 hectares can’t qualify for PRR.
Securing a larger permitted area
If a claim for PRR including an area larger than 0.5 hectares is made and HMRC disagrees with your client, it will refer to the Valuation Office Authority to ask for a determination of the permitted area.
Practice point. The process for this is set out in HMRC’s guidance at CG64860 , but a key part of the referral will be your client’s opinion on the extent of the permitted area. It is therefore essential to make a strong case for the larger area based on its requirement for enjoyment of the property as a residence. Simply being a desirable addition to the property will not be sufficient.
Practice point. Strictly, where a gain is fully covered by PRR it does not need to be reported on a tax return. However, you should advise your client to strongly consider doing so in cases where the land being included in the PRR calculation is significantly larger than 0.5 hectares. Whilst this may mean an enquiry into the return, a full disclosure can offer protection against a discovery assessment being made.
A useful case on the meaning of “required” is Longson v Baker, which is cited in CG64819 . The taxpayer (L) tried to claim PRR on 7.56 hectares of land as the whole property had an “equestrian” character and therefore all of the land, including some used for grazing, was required. However, the High Court judge stated that the key objective test was whether the land was required for the reasonable enjoyment of the property “as a residence”, i.e. was it necessary to keep horses near the property in order to enjoy it as a residence? The answer was “no” in the judge’s view.
Practice point. The question to ask in such cases is “would my client be substantially deprived of being able to use the property as a residence in the absence of the land in question?” If the answer is “no” then it’s likely that PRR won’t apply.
Practice point. It should be noted that the outcome of the Longson case was that an area larger than 0.5 hectares did qualify for PRR, just not all of the land sold with the property. Your client doesn’t need to argue that all of the land qualifies to secure a larger permitted area, just that the required area exceeds 0.5 hectares.
A more recent case with a better outcome for the taxpayer is that of L & C Phillips v HMRC [2020] . The taxpayers lived in a five-bedroom house that was situated in grounds of approximately one acre. The grounds included a swimming pool, triple garage and a small cottage. They reluctantly sold the property as the adjoining land had been acquired by a developer. The gain was not declared on the tax returns, but HMRC investigated the sale following a stamp duty land tax check. It tried to argue that the permitted area should be restricted to 0.5 hectares. The First-tier Tribunal (FTT) disagreed, saying that the rural location of the property suggested it would appeal to somebody looking for a larger house with more space around it for privacy reasons. The taxpayers’ appeal was allowed in full, and the taxable gain HMRC tried to assess was reduced to nil.
Location of land
Land that is acquired independently of the residence, e.g. after the initial purchase, can still qualify. However, land that is physically separate from the residence is unlikely to qualify, unless the circumstances are such that it is typical for the garden to be separate from the residence, e.g. cottages in small villages may have gardens that are located across the street.
The point about land that is physically separate not qualifying for PRR was highlighted in Fountain v HMRC [2015] TC0419 . An area of land behind the taxpayers’ residence (but not adjoining it) had been used for a haulage business. When the business ceased, the taxpayers’ divided this area into five building plots, three of which were disposed of.
The taxpayers built a new house on one plot and claimed that the remaining plot had become part of the garden or grounds of the new residence (following the sale of the original residence). They claimed PRR on the plot when the new property was later sold. The FTT found no evidence that the plot was used as a garden or grounds of the new house, being uncultivated (rather than merely overgrown) at the date of disposal.
Practice point. It is the use of the land at the point of disposal that is key not what it may have originally been used for, so it may be possible to make alterations prior to a sale to increase the chances of securing relief, e.g. planting flowers and removing walls or fences to ensure the area is enclosed with the main residence as a garden or grounds. Of course, your client may still need to convince HMRC that it is required for the “reasonable enjoyment” of the dwelling-house as a residence as discussed above.
Practice point. Additionally, the emphasis on evidence of usage is key. HMRC presented pictures from the website Zoopla to back up its case. Advise your client to take photographs to show that the larger area is actually used for ornamental purposes as the sale date approaches.
Parcels of land
Whilst the client in our scenario has not stated that they are considering selling the land separately to the residence, it is worth considering whether it is possible to do so and qualify for PRR. If the land disposed of is within the 0.5 hectares permitted area, it will qualify for PRR automatically if that land was used as the garden or grounds of the residence at the date of disposal. However, if a client has land in excess of 0.5 hectares, problems can arise. Firstly, it will be necessary to successfully argue that a larger permitted area should apply. Even if this is possible, HMRC may argue that the sale of the parcel of land is evidence that it is not required for the reasonable enjoyment of the property as a residence, particularly if there are a number of disposals of land in this way.
A second potential problem can arise where land is acquired and a residence is later built on it. In the case of Henke v HMRC [2006] UK Sp C 550 , the Special Commissioners agreed with HMRC that the land could not be a garden or grounds prior to the residence being built, so the PRR available had to be apportioned.
Practice point. If your client is looking to sell a parcel of land separately from the residence, it is essential in all cases that this is done before the residence is disposed of. Land retained and sold after the date of disposal of the residence cannot qualify for PRR, unless the separate sale takes place between the date of exchange and the date of completion.
Additional buildings
It is possible for buildings which are separate from the main dwelling-house to be considered to be part of the entity of it and so qualify for PRR. This can apply even if the building is sold separately to the main dwelling-house. However, the ancillary building must be located within the curtilage of the main building and must also be used for residential purposes. Curtilage is not the same thing as the permitted area discussed above. Instead, it can be thought of as the boundary of the dwelling-house itself. Generally, to qualify for PRR an ancillary building can only be linked to the main building if it is in close proximity to one another, so a building located across a road, or separated by a wall or fence, would be unlikely to qualify. However, an annexe providing additional residential accommodation located close to the main building probably would qualify.
Practice point. As a basic rule of thumb, HMRC takes the view that buildings which are within the curtilage of a main house are those likely to pass on conveyance of that house without having to be specifically mentioned. However, this is of limited use as it is likely that any significant buildings will be specifically identified in practice.
HMRC’s guidance places emphasis on the original curtilage test requiring “smallness” of area. However, this view has been challenged in a number of non-tax cases and HMRC’s guidance at CG64245 concedes that there may be occasions where buildings located over a more dispersed area can form a single curtilage depending on the past history of the ancillary buildings in terms of ownership and function.
Practice point. It is important to note that HMRC accepts that an ancillary building may be eligible for PRR if it is located within the permitted area, even if this is outside the curtilage of the dwelling-house per CG64236 .
In addition to the cases cited, a number of older decisions help to build a picture of how the legislation is interpreted by the courts, particularly over the question of curtilage:
- a lodge built for a caretaker separated from the main house by the width of a tennis court was held to qualify for relief (Batey v Wakefield 1981)
- a bungalow situated 130 metres away from the main house and separated by a belt of trees did not qualify for relief (Markey v Sanders 1987)
- a gardener’s cottage located 170 metres from the main house was held not to be appurtenant to it, and so no relief could apply (Lewis v Rook 1992).
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