1. Introduction
Whether Private Residence Relief (“PRR”) applies in your client’s scenario depends on a number of factors. We will explore some issues that need to be considered before giving advice to your client.
PRR is legislated for at s.222 TCGA 1992 and applies to a gain accruing to an individual on the disposal of, or an interest in, a dwelling-house or part of a dwelling-house which is, or has been in his period of ownership has been, his only or main residence. s.222 (1)(b) extends the relief to land which the person has occupied or enjoyed with the said residence as “its garden or grounds up to the permitted area”.
2. Garden or grounds
Garden or grounds is not defined in the legislation nor is there binding judicial authority and as such the words will take their ordinary meaning. HMRC’s interpretation is contained in CG64360 and includes land surrounding a residence which is in the same ownership, unless it is in use for some other purpose. If your client has used part of his garden for other purposes (commercial woodland, agriculture or trade) then no PRR will be available. Similarly, land which is fenced off for development will not qualify for relief.
A building which is separate to the dwelling house, as long as it is within the permitted area, can qualify for relief under s.288 TCGA 92- see CG64200.
If your client’s land is physically separated this may be an issue. Land which is separated from the residence by other land which is not in the same ownership will not normally be part of the garden and grounds of the residence. However, in CG64367 HMRC provide some circumstances where such land will qualify for relief, especially if your client’s property is in a rural location.
3. Size of the permitted area
Going back to the size of your client’s garden, s.222 (2) TCGA 1992 defines ‘the permitted area’ as “an area (inclusive of the site of the dwelling-house) of 0.5 of a hectare’ subject to subsections (3) and (4) of s.222”.
Therefore, where the area of garden and grounds, inclusive of the site of the dwelling house, does not exceed 0.5 hectares, relief is automatically available for the whole area. Having said that it is important to note that relief will only be available if the garden or grounds is enjoyed as part of the residence. For instance, if the client only uses 0.2 hectare as garden and the rest as part of their trade, PRR will only be available for the dwelling and up to 0.2 hectares.
s.222 (3) provides for PRR where the permitted area is larger than 0.5 hectares. Specifically, this provision states “in any particular case the permitted area shall be such area, larger than 0.5 of a hectare, as the Commissioners concerned may determine if satisfied that, regard being had to the size and character of the dwelling-house, that larger area is required for the reasonable enjoyment of it (or of the part in question) as a residence”.
However, as we will see below, relief for a larger area is only available if it can fulfil a stringent set of conditions.
4. Meaning of required
Judicial guidance on the meaning of “required” can be taken from the case of Geoffrey Longson v Victor Baker (HMIT) – [2001] STC 6, which was determined by the Special Commissioner Mr Everett and, on appeal, by Justice Evans-Lombe of the High Court.
In his judgement Mr Justice du Parcq in the Longson case stated that the word “required” goes beyond what the client would like to have or would miss if they lost it. His interpretation was that required means “without it there will be such a substantial deprivation of amenities or convenience that a real injury will be done to the property owner”.
HMRC have also historically adopted a very restrictive view of the term required based on a compulsory purchase order case (Newhill 1938). Whilst one could argue that the meaning of “required” lies somewhere between desirable and essential, HMRC are unlikely to accept this following Longson.
Therefore, whether the excess land is “required” for your client is really going to be a question of fact.
In cases where the land exceeds the permitted area, a District Valuer would also apply an objective test, based on what is required by a typical person for reasonable enjoyment of the property (as a dwelling-house) by reference to the particular property, rather than the particular owner.
When HMRC encounter arguments that area larger than 0.5 hectares are required for the reasonable enjoyment of the dwelling they will have to contact the Valuation Office Agency (VOA). When making their determination, a District Valuer will consider the above and the following:
- The size and character of the dwelling house
- What part of the dwelling house has been used as its owner’s residence
- What land is required for the reasonable enjoyment of that residence
In contrast to the Longson case, the FTT found in favour of the taxpayer in the Phillips & Anor [2020] TC 07859 case which included disposal of gardens of 0.94 hectares. In the FTT’s opinion 0.94 hectares were “required” for the reasonable enjoyment of the property.
In arriving at their conclusion, the FTT looked at a number of factors, not limited to comparable properties but also the size and value of the house and buildings, the ratio of those gardens and the nature of the property’s location. The fact that the property was set in a rural location made it more saleable to somebody who was looking for a large house with a large space. Going forward it will be interesting to see whether HMRC will appeal FTT’s decision or take a more lenient approach to larger properties simply because they are located in semi-rural locations.
The Valuation Office Agency’s technical manual which can be found here also contains some useful guidance regarding the identification of the permitted area.
5. Conclusion
In cases where the permitted area exceeds 0.5 hectares, HMRC expect taxpayers to make a disclosure on their returns explaining why they believe PRR is available. Where the gain is fully covered by PRR, there is no reporting obligation within 30 days of completion (Sch2 FA 2019).
Generally, a gain qualifying for fully covered by PRR relief does not have to be included in a self- assessment return but in your client’s case, as the size of the garden and grounds exceeds the “acceptable” 0.5 hectares, it may be advisable to report this. Although, by doing this they could invite an enquiry under s.9A TMA 1970, the disclosure gives a degree of protection against the discovery provisions under s.29 TMA 1970.
Where it is not reported, HMRC may consider looking for planning permission but where the land marginally exceeds 0.5 hectares, they may not pursue this- see CG64807.
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