The capital gains tax (CGT) relief on disposal of an only or main residence (or ‘private residence relief’ (PRR)) will be familiar to many taxpayers. However, the legislation is far from straightforward. This can lead to misunderstandings and misconceptions about the circumstances in which the relief is available.
Garden or grounds
In addition to PRR being available on the disposal of an individual’s only or main residence, the relief can also apply to the disposal of ‘land which he has for his own occupation and enjoyment with that residence as its garden or grounds’ (up to a ‘permitted area’ as defined in the legislation).
These requirements must be met at the date of disposal of the land. Thus if part of the garden is sold some time after the residence, on a strict interpretation of the legislation a gain on that later sale will not attract relief. This follows from the High Court decision in Varty v Lynes [1976] 51 TC 419. In that case, the taxpayer sold his house and part of the garden in June 1971. He sold the remainder of the garden in May 1972. The taxpayer was assessed to tax on the later disposal, and the High Court subsequently dismissed his appeal.
However, if the garden or grounds are sold separately before the disposal of the dwelling house, the disposal may qualify for PRR if the other relief conditions are satisfied.
Dividing up the residence and garden
It is not uncommon for homeowners to divide their residence and garden into plots, to build a new private residence on one of the plots, and to sell the remaining plots including their old residence. However, if the plots are not divided up and/or sold in the correct order, PRR may be lost in respect of them. In Fountain & Anor v Revenue & Customs [2015] UKFTT 419 (TC), the taxpayers lived at a property (D), part of which was divided into five building plots prior to its disposal. Plots 1 and 5 were sold in March 2006. Plot 3 was gifted to the taxpayers’ son in June 2006. The taxpayers built a new home on Plot 4, into which they moved in January 2007. D was sold in February 2007.
Plot 2 was sold in December 2009. PRR was claimed on the disposal; on the basis that Plot 2 formed part of the garden or grounds of Plot 4, on which the taxpayers’ new private residence had been built. HMRC considered that PRR did not apply to the disposal of Plot 2. The taxpayers appealed. The First-tier Tribunal considered whether, when Plot 2 was sold, it formed part of the garden or grounds of the appellants’ new house constructed on Plot 4. The tribunal held it did not follow that because Plot 2 once formed part of the grounds of D, it then became part of the grounds of Plot 4 when the taxpayers moved to their new home. Furthermore, the fact that Plot 2 and Plot 4 may have been part of the same title registered with HM Land Registry was irrelevant. The tribunal concluded that Plot 2 had never formed part of the garden or grounds of Plot 4. The taxpayers’ appeal was dismissed.
Practical Tip:
The facts that were key to the tribunal’s decision in Fountain were that, at the time of sale, Plot 2 had been levelled, and was uncultivated; Plot 2 was separated from Plot 4 by Plot 3 (which at the relevant point had a house built on it), and Plot 2 was fenced off. The tribunal found that Plot 2 did not ‘adjoin’ or ‘surround’ Plot 4.
Taxpayers who are considering dividing up their residence and garden into plots should bear in mind the Varty v Lynes and Fountain cases in terms of maximising potential PRR claims.
