When is a Garden not a Garden?

Private residence relief ensures that a capital gains tax charge does not arise when a person sells a property that has been their only or main home throughout the period of ownership.

Where the property has been the only or main home for only part of the period of ownership, private residence relief is only available for the period that the property was occupied as the only or main home. The final nine months of ownership is deemed to be occupied (36 months when owner moves into care).

In the majority of cases the garden of the property will fall within the scope of private residence relief. However, where the grounds are extensive or not directly connected to the residence, relief for the garden as a whole is not a certainty.

The legislation states that land or a garden that has been ‘enjoyed with the property’ will fall within the scope of the relief where the size of the garden does not exceed the ‘permitted area’.

Permitted Area is defined as 0.5 hectares (1.24 acres) including the land occupied by the house. Therefore, if the garden and grounds are not more than 0.5 hectares, as long as the conditions for the relief are met, the whole area automatically qualifies for relief.

However, the land must comprise the gardens and grounds of the residence – land which does not form the garden and grounds does not qualify for the relief, even if the total amount of land disposed of with the residence is not more than half a hectare. The test is house and garden up to 0.5 hectares, not the first 0.5 hectares of land.

If the grounds are more than 0.5 hectares it is still possible to obtain private residence relief on the entire property. A larger area may qualify if it is considered necessary ‘for the reasonable enjoyment of the property’. In determining whether this test is met, HMRC will take account of:

• the size and character of the dwelling house;
• the part of the dwelling house that has been used as the owner’s residence; and
• the amount of land that is required for the reasonable enjoyment of the residence.

It is also important to consider the general setting and the property’s surroundings. It will be normal for a large property in a city to have a significantly smaller garden than a similar sized house in the county.

A common cause of problems in relation to private residence relief is the part disposal of a garden separate from the house. If part of the garden is sold and the house is retained, HMRC may argue that the land that was sold was not required for the reasonable enjoyment of the property. There are limited circumstances in which HMRC would accept that the disposal did qualify for relief.

Clearly, the sale of any part of the garden that had been retained after the disposal of the house will not qualify for private residence relief as at the date of disposal the land is not held with the residence as its garden or grounds.

Author Dan Morgan CTA