In our weekly Q&A, Croner Taxwise tax adviser Ibrahim Nalla, examines the tax compliance issues around private residence relief when owners dispose of their main residence and have to account for garden sales
Q. Our clients are downsizing and are disposing of their main residence. The property has two acres of garden. Would the whole area qualify for private residence relief (PRR)?
A. Whether PRR applies in your client’s scenario depends on a number of factors. We will explore some issues that need to be considered before giving advice to your client.
PRR is legislated for at section 222 Taxation of Chargeable Gains Act 1992 (TCGA 1992) and applies to a gain accruing to an individual on the disposal of, or an interest in, a dwelling-house or part of a dwelling-house which is, or has been in their period of ownership their only or main residence.
Section 222 (1)(b) extends the relief to land which the person has occupied or enjoyed with the said residence as ‘its garden or grounds up to the permitted area’.
Garden or grounds
Garden or grounds is not defined in the legislation nor is there binding judicial authority and as such the words will take their ordinary meaning.
HMRC’s interpretation is contained in CG64360 and includes land surrounding a residence which is in the same ownership, unless it is in use for some other purpose.
If your client has used part of their garden for other purposes (commercial woodland, agriculture or trade) then no PRR will be available. Similarly, land which is fenced off for development will not qualify for relief.
A building which is separate to the dwelling house, as long as it is within the permitted area, can qualify for relief under s288 TCGA 92. See CG64200.
If your client’s land is physically separated this may be an issue. Land which is separated from the residence by other land which is not in the same ownership will not normally be part of the garden and grounds of the residence. However, in CG64367 HMRC provides some circumstances where such land will qualify for relief, especially if your client’s property is in a rural location.
Size of the permitted area
Going back to the size of your client’s garden, s222 (2) TCGA 1992 defines ‘the permitted area’ as ‘an area (inclusive of the site of the dwelling-house) of 0.5 of a hectare’ subject to subsections (3) and (4) of s.222’.
Therefore, where the area of garden and grounds, inclusive of the site of the dwelling house, does not exceed 0.5 hectares, relief is automatically available for the whole area.
Having said that it is important to note that relief will only be available if the garden or grounds is enjoyed as part of the residence. For instance, if the client only uses 0.2 hectare as garden and the rest as part of their trade, PRR will only be available for the dwelling and up to 0.2 hectares.
Section 222 (3) provides for PRR where the permitted area is larger than 0.5 hectares. Specifically, this provision states ‘in any particular case the permitted area shall be such area, larger than 0.5 of a hectare, as the Commissioners concerned may determine if satisfied that, regard being had to the size and character of the dwelling-house, that larger area is required for the reasonable enjoyment of it (or of the part in question) as a residence’.
However, as we will see below, relief for a larger area is only available if it can fulfil a stringent set of conditions.
Meaning of required
Judicial guidance on the meaning of ‘required’ can be taken from the case of Geoffrey Longson v Victor Baker (HMIT) –  STC 6, which was determined by the Special Commissioner Mr Everett and, on appeal, by Justice Evans-Lombe of the High Court.
In his judgment Justice du Parcq in the Longson case stated that the word ‘required’ goes beyond what the client would like to have or would miss if they lost it. His interpretation was that it means ‘without it there will be such a substantial deprivation of amenities or convenience that a real injury will be done to the property owner’.
HMRC has also historically adopted a very restrictive view of the term required based on a compulsory purchase order case (Newhill 1938). Whilst one could argue that the meaning of ‘required’ lies somewhere between desirable and essential, HMRC is unlikely to accept this following Longson.
Therefore, whether the excess land is ‘required’ for your client is really going to be a question of fact.
In cases where the land exceeds the permitted area, a district valuer would also apply an objective test, based on what is required by a typical person for reasonable enjoyment of the property (as a dwelling-house) by reference to the particular property, rather than the particular owner.
When HMRC encounters arguments that areas larger than 0.5 hectares are required for the reasonable enjoyment of the dwelling they will have to contact the Valuation Office Agency (VOA). When making their determination, a district valuer will consider the above and the following:
- the size and character of the dwelling house;
- what part of the dwelling house has been used as its owner’s residence; and
- what land is required for the reasonable enjoyment of that residence.
In contrast to the Longson case, the First Tier Tribunal (FTT) found in favour of the taxpayer in the Phillips & Anor  TC 07859 case which included disposal of gardens of 0.94 hectares. In the FTT’s opinion 0.94 hectares were ‘required’ for the reasonable enjoyment of the property.
In arriving at their conclusion, the FTT looked at a number of factors, not limited to comparable properties but also the size and value of the house and buildings, the ratio of those gardens and the nature of the property’s location.
The fact that the property was set in a rural location made it more saleable to somebody who was looking for a large house with a large space. Going forward it will be interesting to see whether HMRC will appeal FTT’s decision or take a more lenient approach to larger properties simply because they are located in semi-rural locations.
The Valuation Office Agency’s technical manual also contains some useful guidance regarding the identification of the permitted area.
In cases where the permitted area exceeds 0.5 hectares, HMRC expects taxpayers to make a disclosure on their returns explaining why they believe PRR is available. Where the gain is fully covered by PRR, there is no reporting obligation within 30 days of completion (Sch2 Finance Act 2019).
Generally, a gain qualifying for fully covered PRR relief does not have to be included in a self- assessment return but in your client’s case, as the size of the garden and grounds exceeds the ‘acceptable’ 0.5 hectares, it may be advisable to report this.
Although, by doing this they could invite an enquiry under s9A Taxes Management Act 1970 (TMA 1970), the disclosure gives a degree of protection against the discovery provisions under s29 TMA 1970.
Where it is not reported, HMRC may consider looking for planning permission but where the land marginally exceeds 0.5 hectares, they may not pursue this - see CG64807.
About the author
Ibrahim Nalla is a tax adviser at Croner Taxwise
For further information, see Croner-i capital gains tax for land and buildings toolkit