Whilst an Englishman’s Castle is often his Capital Gains Tax-free home, the same is not always the same for his garden. Just because the house may be tax-free due to the Principal Private Residence relief (PPR), it could be a costly mistake to assume that the garden is also included in the same pot.
In its simplest form, PPR is available on a home (or part thereof) that has been an individual’s only or main home during their period of ownership and includes land which has been for his/her own occupation and enjoyment with that residence as part of its garden or grounds and up to the permitted area. From this (simple?) statement, already there are conditions attached to the “garden”.
Firstly, the permitted area is restricted to 0.5 hectare (or just under 1.25 acres in old money) and this includes the footprint of the house. Where the garden is of a style commensurate with the property, larger areas will attract the PPR relief – for example 3 hectares of formal gardens at a manor house could be appropriate to the style of the house, but the same sized plot for a semi-detached house at the edge of town would more than likely find the relief restricted to the 0.5 hectare permitted area and a capital gains tax liability arising on the rest.
The dictionary definition used by HMRC is that a garden is a piece of land used for recreation, usually partly grassed and adjoining a private house, it can also be used for growing flowers, fruit and vegetables. Here we now have the important restriction that will exclude exclusive business use of the grounds, or agricultural or development use. “Grounds”, in turn, are taken to be slightly larger than a mere garden, are usually enclosed and either surrounding or attached to the dwelling house.
HMRC will generally take the view that a house and grounds come as a package when acquired and so if you later increase the size of your garden, you must ensure that the new land is brought into use genuinely as part of the garden to be covered by PPR (other conditions notwithstanding). A person who has his garden some distance from his home will find it much harder to extend his PPR area to cover all of his land – especially if it had been purchased at a different time to the house. That said, if a garden is genuinely associated with a property, the existence of a road between the two does not automatically prevent a PPR claim.
The use of the land at the date of sale is important too. Land that may be completely unused and overgrown but could be shown as historically having been used as part of the garden can qualify, as can areas of woodland, other buildings, riverbanks and some paddocks, always with a view as to the size, usage and location of the land (relative to the house), and style and presence of the home.
The order of disposal should also be considered. If the owner of the house sells off part of the garden whilst continuing to live there, the part sale of the garden will attract PPR (other conditions of course notwithstanding). However, as the grounds will only qualify for relief if it is the garden of the residence at the time that the residence is disposed of, if the owner disposes of the house before the garden, relief for the land retained is affected.
So it should not automatically be assumed that a garden will attract the same tax relief as a house. The position should be checked before any disposals take place and potentially remedial action could take place first – for example bringing grounds back into use as part of the garden to maximise the exemption.
Gardens are not always green – sometimes they have grey areas too.
For more information on the above tax implications please speak to your usual Ensors contact, send us a quick enquiry or email Danny Clifford, Tax and Trusts partner.