In this second part of the series, we shall consider sales of land or ‘other buildings’ associated with a person’s main residence. In other words, where there is no dispute that at least part of a substantial property is a qualifying main residence, and where portions are being sold on.
This can, for instance, occur when a large residence is sold in parts, or an adjoining plot of land is sold. Note that the eligibility of subsidiary elements of a residence may be restricted to the extent to which the main building is used as the claimant’s residence.
The Basic Rules for Grounds, etc.
In relation to any (or any part of any) land which the vendor has had for (to quote the tax law) “his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area”, the garden or grounds are potentially eligible for PPR relief.
“The permitted area” is currently up to 0.5 hectares – or 5,000 m2 – including the site of the dwelling.
But if the area “required for the reasonable enjoyment” of the dwelling house as a residence – having regard to the size and character of the house – exceeds 0.5 hectares, then the “permitted area” can be increased accordingly.
The precise wording can be found in The Taxation of Chargeable Gains Act (TCGA) 1992, s 222. It is probably fair to say that those few lines make up one of the most frequently contested areas of tax legislation. In the space afforded by an article of this size, we can look only quite briefly at the main points and of course if there is significant tax at stake, then proper consultation with a suitably qualified adviser is essential.
Let’s look first at what exactly is “the dwelling”, let alone the garden and grounds...
Can a “Main Residence” be More than One Building?
Yes, without doubt. It follows that one (or more) of those buildings may potentially be sold, free of capital gains tax. Also, the larger the scale of the “dwelling house” – especially spread over several buildings, the more likely that the aforementioned “permitted area” of garden or grounds will be greater, reflecting the size and character of that house.
HMRC uses Batey v Wakefield ([1981] STC 521) as authority for its approach: not only can an eligible dwelling house comprise more than one building, but it can include ancillary buildings that are dwelling houses in their own right – see for instance Capital Gains Manual CG64230. From a practical perspective, HMRC will determine the extent of the dwelling house as a single plot – which is potentially quite helpful if, say, the dwelling is two buildings a hundred metres apart.
It is worth considering this issue in further detail, since significant opportunity can be available in the right circumstances. To do so, we must examine HMRC’s position more closely, and get to grips with “curtilage".
Curtilage
“Curtilage” is generally taken to mean “a small court, yard or piece of land attached to a dwelling house and forming one enclosure with it.” Simplistically, it helps to define the boundary of the dwelling house: if an ancillary building falls within the curtilage of the main building, then they can be said together to form a single dwelling – provided of course that the ancillary building is used for residential purposes. Note that we are not using curtilage to define the garden or grounds that make up the “permitted area” referred to above, but broadly the perimeter of what makes up the dwelling house itself. (The “permitted area” can extend beyond).
HMRC uses the legal case of Lewis v Rook ([1992] STC 171) to justify the position that “curtilage” can extend to link only those buildings in close proximity to each other, that a public road or wall between buildings will normally mean that they cannot form part of the same curtilage and that “buildings which are within the curtilage of a main house are also likely to pass on conveyance of that house without having to be specifically mentioned”.
HMRC Guidance and its Limitations
We have previously warned in Tax Insider that HMRC guidance is useful so long as it is exactly that: useful. It is not law. And it isn’t always right. This is one of those areas where HMRC guidance goes only so far:
- As ever greater precision and clarity is required of solicitors, it is unlikely that ancillary buildings of any significance will not be specifically identified on sale, so trying to restrict buildings to those which aren’t mentioned is questionable.
- Non-tax cases such as Secretary of State for the Environment v Skerritts of Nottingham Ltd ([2001] QB 59), and Ray Wheeler v First Secretary of State ([2003] EWHC 1194) effectively challenge HMRC’s requirement that curtilage must be ‘small’, and place greater emphasis instead on the buildings’ histories, and whether or not they have been ‘used’, bought and sold together. For instance, the latter case said “ground which is used for the comfortable enjoyment of a house or other building may be regarded in law as being within the curtilage of that house”
So, there is case law to justify a different view to that in HMRC’s guidance. To be fair, HMRC does accept that many property owners in built-up areas will own garages some distance away, separated by other buildings, paths or roads, etc., but that these can nevertheless be part of the dwelling house (CG64290).
The “Permitted Area” of Garden or Grounds
Having established the scope of the relief available in respect of buildings (and potentially land) comprised in the main dwelling house itself, we can then look to the area of garden or grounds which may be disposed of and which may also be eligible for the relief. Note that HMRC accepts that even if an ancillary building doesn’t form part of the curtilage of the dwelling house, it may nevertheless be eligible for PPR where it stands in the permitted area (CG64236).
As outlined above, there is a basic ‘cap’ of 0.5 hectares for garden and grounds and dwelling house. If some of the land in question is used for non-residential purposes – say instead for trading purposes, then that proportion cannot qualify for PPR Relief.
Clearly, the cap can potentially work to limit the amount of garden and grounds eligible for relief, if the site of the dwelling house is substantial. However, given that the law also allows the cap to be increased where commensurate with the size and character of the dwelling house, it is practically more likely that a larger dwelling house will warrant a permitted area greater than 0.5 hectares.
A garden is generally taken to be part of the ‘grounds’ of the house; the grounds are generally taken to be “enclosed land surrounding or attached to a dwelling house... ...serving chiefly for ornament or recreation.”
HMRC’s Capital Gains Manual at CG64360 (also) states that land acquired independently of the house may still qualify if it is so used as garden or grounds on disposal.
It is use such as for agriculture or for business purposes which generally precludes relief. But use such as for a paddock or an orchard should not be excluded unless there is significant business use; nor should land which has traditionally been treated as garden or grounds but which has fallen into disuse.
“...Required for the Reasonable Enjoyment”
“Required” has been equated with “necessary”, rather than “desirable”, which is unhelpful (CG64819). But “reasonable” is open to interpretation.
The Valuation Office Agency advises that “enjoyment” simply means possession without contested claims from third parties.
Practical Tips :
- It is possible to sell chunks of land – or even separate buildings – without selling the main home itself, and still to get the PPR exemption. It is also possible to sell several plots and still to qualify – even where the aggregate area exceeds the “permitted area” (CG64829)
- However HMRC are likely to come back with the challenge that those plots weren’t required for the reasonable enjoyment of the property, if they can be sold separately without significant adverse effect on the use, or marketability, of that main home – although financial necessity may prove an acceptable counter argument (CG64832).
- Don’t retain and then sell plots of land after selling the home as the test of the use of the land, and whether or not it is enjoyed as part of the residence, etc, is at the point of sale of the land, so if the home has already been sold, it cannot be the vendor’s eligible residence at that point. (Although – and with great care – one might be able to exchange contracts on the land before conveyance of the house and it still be treated as one’s eligible main residence) (CG64385).
- Don’t forget that the restriction on relief which we mentioned in Part 1 (“Intention Counts”) also applies here – so acquiring a property with the express intention of ‘breaking it up’ is unlikely to result in a happy ending; likewise trying to develop the land oneself is likely to result in a significant restriction on the amount of the gain which HMRC consider is eligible for relief.
Lee Sharpe
