When will large gardens and grounds qualify?
Principal Private Residence Relief ("PPR") is a relief from Capital Gains Tax ("CGT") on the disposal of an individual's only or main residence. If all of the conditions are met, all (or part, depending on the circumstances) of the gain realised on the sale of the main residence will be exempt from CGT. The relief is automatically available for gardens and grounds up to 0.5 hectares (provided that the land is held with the residence), known as the 'permitted area'.
The permitted area may extend beyond 0.5 hectares where the surplus land and grounds are required for the reasonable enjoyment of the dwelling house as a private residence, taking into account the size and character of the property.
A recent case in the First Tier Tribunal has shed light on the circumstances in which land and grounds exceeding 0.5 of a hectare will qualify for PPR.
Phillips v The Commissioners for HMRC
Mr and Mrs Phillips bought their house in 1997. In total the plot included the main house, a three car garage, a small one bedroom cottage, a swimming pool and substantial gardens. The entire plot covered 0.94 of a hectare. They sold the property in 2014 to a developer and the gain was not included on their tax returns as they believed that the entire plot qualified for PPR.
HMRC investigated the disposal after observing the plot exceeded the automatic permitted area threshold and concluded the property was not of a size and character requiring grounds beyond 0.5 of a hectare. HMRC issued an assessment to Mr and Mrs Phillips for £162,820, representing the CGT liability attributable to the gain made on 0.44 of a hectare of land beyond that which automatically qualifies for PPR.
HMRC presented comparator properties situated in more built up areas, with grounds ranging from 0.09-0.3 of a hectare which demonstrated, they argued, that purchasers of an "executive property" would be content with much less extensive grounds. As such, it was argued that the entire 0.94 of a hectare was not 'required' for enjoyment of the property and the excess 0.44 of a hectare should not benefit from PPR.
However, Mr and Mrs Phillips argued that the properties put forward by HMRC were not comparable in character to their own house. Looking at the context of their own house in terms of its large size, character and semi-rural location, the grounds were proportionate to what a buyer would expect in terms of space and privacy. The comparator properties presented by Mr and Mrs Phillips were all in semi-rural locations and had a significant amount of open land around them.
Following the sale to the developer, the main house remained, but no longer had the three car garage, cottage or swimming pool. It was later sold on with a plot of 0.1 hectare. HMRC argued that the house remained much the same as sold by Mr and Mrs Phillips and this demonstrated that the garden and grounds of 0.94 hectares were not needed for the reasonable enjoyment of the property. Mr and Mrs Phillips argued that the character of the property had been fundamentally changed by the fact it was now surrounded by other properties built by the developer and it was no longer in a semi-rural setting, but was in a suburban setting.
The Tribunal held, in light of the size and character of the property, including the location, the entire 0.94 of a hectare was necessary for the reasonable enjoyment of the house and as such Mr and Mrs Phillips were not liable for any CGT on the sale of the property and grounds.
The case highlights that context is everything, purchasers of property in suburban areas have very different requirements than those looking to buy rural property where more extensive grounds would be expected. When assessing whether grounds exceeding 0.5 of a hectare are required for the reasonable enjoyment of a property, consideration will need to be given to the size and character of the property and any other relevant factors, such as the setting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.