CGT Relief: How Big Is My Garden?

Sarah Bradford asks what counts as your garden for only or main residence relief purposes, and examines the limit on the size of garden that qualifies.

The only or main residence relief (or ‘principal private residence’ relief, as it is sometimes known), for capital gains tax purposes, is well known and oft misunderstood. Most people think of their house and garden as a single entity and assume that if the house qualifies for relief, the garden gets to come along for the ride. However, this is not always the case, as land that surrounds a house will not automatically qualify. Further, the legislation places a cap on the permitted size of the garden.

The only or main residence relief applies to a dwelling house, or part of a dwelling house, that is (or which has been) during the individual’s period of ownership, his or her only or main residence, and to land which the individual has for his or her own occupation and enjoyment with that residence as part of its garden or grounds, up to the permitted area. In the first instance, the legislation defines the permitted area as 0.5 of a hectare (see below). This area includes the land on which the dwelling house stands. However, in certain cases, a larger area may qualify for relief.

The legislation does not define what is meant by `garden’ or `grounds’ and consequently the terms take their ordinary everyday meaning. In their Capital Gains manual (at CG64360), HMRC cite the following dictionary definition of `garden’:

“a piece of land, usually partly grassed and adjoining a private house, used for growing flowers, fruit and vegetables, and as a place of recreation”.

By contrast, the word `grounds’ implies an area that is bigger than a garden and in their manual, HMRC adopt following dictionary definition of `grounds’:

“enclosed land surrounding or attached to a dwelling house or other building which is attached to a dwelling house or other building serving chiefly ornament or recreation.”

HMRC will generally accept that that land surrounding a residence that is owned by the same person or persons constitutes grounds of that residence, unless it is used for another purpose.

For land to fall within the definition of `grounds’ that land must be used for ornamental or recreation purposes. It follows therefore that if the land in question is used for other purposes, such as for the purposes of a business or for agricultural or development purposes, it will not be treated as part of the residence’s grounds. As a result, it will not benefit from the main residence exemption.

However, land which has historically been part of the garden or grounds of the residence but which is unused or overgrown at the date of disposal remains part of the garden or grounds for the purposes of the exemption. Similarly, land which is used as a paddock or orchard can be within the scope of the exemption, as can land which has another building on it, as long as that building is not used for the purposes of a business.

It should be noted that the where there is mixed use of the land, for example for both recreational and business purposes, the garden or grounds will still qualify as long as the other tests are met. This may be the case, say, where the grounds of a house are used for recreational purposes for most of the year, but are made available for campers attending a nearby festival for one week in the summer.

It is generally the case that a house and its garden or grounds come as a package and are purchased at the same time. However, it may also be the case that some or all of the surrounding land was purchased at a different date. As long as any land purchased subsequently is brought into use as the garden or grounds of the residence, it will qualify for the main residence exemption provided that the other conditions are met.

The garden and grounds of a residence normally surround and enclose a residence. Consequently, land that is geographically separated from the residence will not normally be regarded as being part of the garden or grounds of the residence, even if it was bought at the same time as the residence and by the same person.  

However, if the land is naturally and has traditionally been the garden of the property, despite being physically separate from it, and has been conveyed with the property, relief will be allowed. However, where a person buys an additional plot of land because they want more garden than they currently have, the separate plot will not be part of the main residence for exemption purposes.

The test as to whether land surrounding a residence is its grounds or gardens for the purposes of the main residence exemption need only be met on the date on which the disposal occurs. Unlike the residence (in respect of which it is necessary to look at the use of time), it is only necessary to consider the garden at the date of disposal. The extent of main residence relief is determined by the use of the property, and to the extent that relief is available in respect of the property, it is also available in respect of any land that can be regarded as garden and grounds at the date of disposal. It does not matter what use the land had been put to previously.

As long as the grounds are used for recreational purpose at the date of sale, they will qualify for only or main residence relief (as long as the other conditions are met). It does not matter if they have been used for business use previously. Returning land to use as a garden prior to sale can bring it within the scope of the exemption.

The order of disposal can be important if the house and gardens are not sold together. The land can only qualify for relief if it is the garden or grounds of the residence at the date of disposal. If the owner sells off part of his or her garden, while continuing to live in the house, the part disposal or part of the garden will qualify for relief. 

By contrast, if the owner sells the house and some of the garden, but retains ownership of the remaining part of the garden, relief will be available for the part of the garden that is sold with the house. However, there will be no relief for the subsequent sale of the retained part of the garden as at the date it is not held together with the residence. This was established in the case of Varty v Lynes Ch D 1976, 51 TC 419.

The legislation imposes a limit on the size of garden or grounds that can qualify for only or main residence relief along with the property. This is referred to in the legislation as the `permitted area’ and is defined as an area of 0.5 of a hectare. 

However, where the garden and grounds, including the dwelling house itself, cover an area of more than 0.5 of a hectare, relief may be given for a larger area, if such a larger area is regarded as reasonable for the enjoyment of the dwelling house having regard to its size and character. The Valuation Office Agency is responsible for determining the size of the permitted area. 

It should not be automatically assumed that all land owned with your home would necessarily qualify for main residence relief. The position should be reviewed prior to disposal and action (e.g. bringing land previously used for other purposes back into use as a garden) should be taken to maximise the exemption. 

Where the land covers an area of greater than 0.5 of a hectare, a case should be made to the Valuation Office Agency for a larger area to qualify for relief.