Sarah Bradford examines the application of main residence relief to a house with land.
Main residence relief prevents a capital gains tax liability arising on the sale of one’s home. There are, of course, conditions – the main one being that the property must be the taxpayer’s only or main residence. Where this condition is met throughout, any gain arising on disposal is tax-free. Where the property has been the only or main residence during at least some of the period of ownership, at least some of the gain will be tax-free.
Many properties have a garden – and some have a lot of land. Does this too fall with the terms of the relief?
The legislation extends the application of main residence relief to land which is disposed of at the same time as the residence and which is occupied and enjoyed as the garden or grounds of the residence. However, the area of the land must not exceed the permitted area.
Occupation as garden and grounds
For the relief to apply to the associated land, the land must be occupied and enjoyed with the residence as its garden or grounds. There is no statutory definition of `garden or grounds’ for these purposes, so the ordinary everyday meaning applies.
In their Capital Gains Tax manual (at CG64360), HMRC quote 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.’
One may think of a typical suburban garden comprising a lawn surrounded by shrubs and flowers; although it is not necessary for a garden to fit this template to qualify.
HMRC note (also at CG64360) that the word `grounds’ infers an area larger than a garden, and provide the following dictionary definition:
`enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation’.
As a general point, HMRC will accept that land surrounding a residence which is in the same ownership is the grounds of the residence – unless the land in question is used for something else.
Use at date of disposal
Unlike the residence itself, for the garden and grounds, it is only the use at the date of disposal that is relevant. This introduces planning opportunities, so that if land has been used other than for as garden or grounds, such as for agriculture or for a trade, it can be bought back within the scope of the relief if it is used as a garden or grounds at the date of sale. Land which has traditionally formed the garden or grounds will not be excluded from the scope of the relief if it is overgrown at the date of sale; nor will land used as an orchard (unless there is significant business use) or land that has a building on it (unless the building is used for a trade or let).
The land used as a garden or grounds does not need to be acquired on the same date as the residence – however, it must have been bought into use as the garden or grounds and used in this way at the date of disposal.
Land physically separated from residence
HMRC are generally reluctant to accept that land physically separated from the residence constitutes the grounds or gardens of the residence. Normally, they would expect the garden and grounds to be the land that surrounds the residence. However, it should be possible to secure the relief if it can be shown that land, although physically separated from the residence (such as on the other side of a lane) has traditionally been enjoyed as the garden of the property and conveyed with it – although the fact that the land and the residence are in the same ownership will not on its own be enough. However, a separate plot of land cultivated by a keen gardener who simply wants more garden will not qualify.
Separate disposal of land
For various reasons, the house and land (or some of the land) may be sold separately. This may be the case if the property has a large garden and some of it is sold for development purposes. Here the timing is important. If the separate parcel of land is sold first and at the time of its disposal it was part of the garden or grounds, the relief should be available. However, if the separate parcel of land is sold after the residence, the relief is lost because at the time of the disposal of the land it no longer forms part of the garden or grounds of the residence.
Although rare, it may be that a person owns the garden and grounds, but not the residence in which they live – for example, if a parent has transferred the grounds to a daughter, but retained the house, which the daughter rents. In this situation, if the daughter sells the grounds while living in the house, relief will be available.
A limit is placed on the size of garden and grounds that qualify for main residence relief. This is known as the ‘permitted area’ and is an area of 0.5 of a hectare, or such larger area as is required for the reasonable enjoyment of the dwelling house having regard to the size and character of that house.
Consequently, as long as the area of the plot, including the house and the gardens, is not more than 0.5 of a hectare, assuming the other conditions for relief are met, the whole area will automatically qualify for relief.
However, where relief is sought for a larger plot, the responsibility for determining the size of the qualifying plot – the permitted area – falls to the Valuation Office Agency. In reaching a decision, consideration will be given to:
For example, one would expect a country house to have more land than a property in the centre of a town. Likewise, if the taxpayer had a large house and used all of it as a residence, a larger garden would be appropriate than if only part of the property was used as a residence.
In deciding what is required, it is worth noting that this is not the same as what the owners of the house would like to have – and this is a distinction that has been made by the courts. While a taxpayer may like some land on which to keep horses, this is not necessary for the enjoyment of the property.
In making a case to the District Valuer for the permitted area to exceed 0.5 of a hectare, it is useful to provide evidence to show how the land is used as the garden and grounds and, where possible, how this has historically been the case. Past sales showing the residence and land conveyed as a single parcel will also help the case. Where the land is within a physical boundary encasing the property and the land, such as a walled boundary, it will have more of a feel of grounds than, say, an adjacent paddock.
Main residence relief is available for land occupied and enjoyed as the garden or grounds of the residence at the time of disposal, as long as it does not exceed the permitted area. So, in order not to waste the relief, make sure this condition is met at disposal and do not dispose of the land separately after the residence.
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