The ‘permitted area’ around a residential property qualifies for private residence relief from capital gains tax
The area of garden and grounds of a person’s residence that qualifies for capital gains tax relief is referred to in the legislation as the ‘permitted area’. HMRC does state that ‘you will not get Private Residence Relief if you dispose of all or part of your garden after you have disposed of your home’.
The Taxation of Chargeable Gains Act 1992 section 222(2) 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 section 222.
Sections 222(3) and (4) state:
‘(3) 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.
(4) Where part of the land occupied with a residence is and part is not within subsection (1) above, then (up to the permitted area) that part shall be taken to be within subsection (1) above which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the residence.’
If the garden and grounds of the residence, including the site of the dwelling house, do not exceed 0.5 of a hectare (5,000sq m), then relief is automatically due for that whole area.
If the garden and grounds of the residence exceed 0.5 of a hectare then relief may be available for a larger area if that larger area can fulfil various tests. These tests are explained in Capital Gains Tax Manual CG64818 and below.
Interpretation of section 222(3)
This section was considered in Longson v Baker (73TC415). Dr Longson claimed that land additional to the permitted 0.5 of a hectare, which was used to house and graze his horses, was required for the reasonable enjoyment of his dwelling house. He contended that all of the land purchased with the property (7.56 hectares) was required, by virtue of the ‘equestrian character’ of the property.
Evans-Lombe J commented in the High Court:
‘It is clear from the words “required for the reasonable enjoyment” in subs(3), that the test to be applied as to what any larger permitted area can consist of over the 0.5 hectares allowed by the section, is an objective test. In my judgment it is not objectively required, ie necessary, to keep horses at a house in order to enjoy it as a residence. An individual taxpayer may subjectively wish to do so but that is not the same thing.’
It was decided that 1.054 hectares was reasonably required for the enjoyment of the house and this larger permitted area was allowed, but not the entire area of 7.56 hectares.
Read more about the case here.
Interpretation of section 222(4)
This section sets out that where the garden and grounds occupied and enjoyed with a dwelling house are in excess of the permitted area, the part to be determined as the permitted area is the part ‘most suitable for occupation and enjoyment with the residence’.
If the grounds of a residence are not all of equal value – for example, if part of the grounds has development value – it may be just as important to determine the location of the permitted area as it is to determine its size.
This is a matter for the Valuation Office Agency to determine, although the taxpayer can appeal against this in the same way as the decision on the extent of the permitted area.
Procedure to be followed by HMRC where permitted area is at issue
If there is a disagreement about the extent and location of the permitted area, it is the responsibility of the Valuation Office Agency to decide the extent and location of the permitted area.
Valuation Office Agency
The Valuation Office Agency’s role is to determine the extent of the permitted area of the garden and grounds in cases where it is claimed that the permitted area is an area greater than 0.5 of a hectare. In these circumstances, the HMRC inspector should seek the assistance of the agency.
Capital Gains Technical Group
If agreement cannot be reached in respect of either the extent or the location of the permitted area, then the HMRC inspector should make a report to the Capital Gains Technical Group.
The process will then proceed as explained in the link above and below.
Sale of garden or grounds separately from the dwelling house
If the garden or grounds is disposed of before the disposal of the dwelling house, relief will be available as long as it was garden or grounds at the date of disposal and it was part of the permitted area.
Land disposed of separately after the disposal of the dwelling house will not qualify for relief in line with the decision in the case of Varty v Lynes (51TC419).
There is no automatic entitlement to relief on the full area of land if that land is not the garden and grounds of the residence at the date of disposal. For example, if a person has a house and two hectares of land but of that land only 0.2 hectares are garden and grounds, with the remainder being used for the purposes of a trade, relief only extends to the dwelling house and 0.2 hectares. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64815
If some or all of the garden and grounds of a dwelling house are sold under a separate contract between the date of exchange of contracts and the date of conveyance of the dwelling house, then provided that the other tests of TCGA 1992 s222 are met, relief may be due. However, if the contract for the disposal of the land is dated after the date of conveyance of the dwelling house, then relief will not be due.
For example, Miss A owns a dwelling house that has been her only or main residence, together with garden and grounds of 0.5 of a hectare. In May 2017 she contracts to sell the house together with 0.1 of a hectare of land as a residence. The house and land are conveyed to the new owner in July 2017. In June 2017 she contracts to sell the remaining 0.4 of a hectare of land to a developer. If the other conditions for relief are fulfilled, relief will be available on the disposal of the 0.4 of a hectare of land.https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64385
One hectare is 10,000sq m (approximately 2.47 acres).
TCGA 1992 can be found here.
Article from ACCA In Practice