Capital Gains Tax on Gardens and Grounds
When you sell your home, you might reasonably expect to pay no Capital Gains Tax (CGT) on the disposal due to what’s called Principal Private Residence (PPR) Relief. And for most homeowners selling their home, that must be right as the PPR relief will exempt any gain home from CGT if:
- the house has been your only or main residence throughout your period of ownership;
- you have not been absent for more than an allowed period of absence;
- the garden or grounds are not greater than the permitted area; and
- no part of your home has been used exclusively for business purposes.
However, the third requirement relating to the garden or grounds has been in the spotlight recently as it is one of the methods by which HM Revenue and Customs (HMRC) can enhance tax revenues from higher-value residential property.
How to determine whether your grounds and gardens are greater than is permitted
This brings into focus the procedure for determining your garden and grounds. There is a little known five-step process whereby you should:
- determine which buildings qualify as your main residence;
- determine which land occupied with the garden or grounds can be described as garden or grounds;
- determine, if the garden or grounds are in excess of 0.5 of a hectare, how much of the land is required for the reasonable enjoyment of the dwelling house as a residence;
- determine which part of the garden or grounds would be the most suitable for occupation and enjoyment with the residence; and finally
- apportion the proceeds of disposal and the acquisition cost between the part of the property qualifying for relief and the remainder.
This five-step process needs to be followed in strict order to avoid the natural process of going straight to step four and determining the location of the permitted area. Care should also be taken to avoid mixing up the requirement test in the third stage and the most suitable test in the fourth stage. Finally, it is also important to have addressed the first and second stages with larger properties or estates where there may be cottages, stables, or outbuildings in addition to the main house which together may properly be regarded as the entity of the dwelling house.
So what does that all mean?
The basic position is that if the garden and grounds of the residence, including the site of the dwelling house, do not exceed 0.5 of a hectare (5,000 sq m or just under 1.25 acres), then relief is automatically due for the whole area.
In some limited cases involving larger properties, if the site of the dwelling house exceeds 5,000 sq m, then an area in excess of 5,000 sq m will qualify for PPR relief, being the site of the dwelling and its garden and grounds.
If, as is more normally the case with larger properties, the garden and grounds of the residence exceed 0.5 of a hectare then relief may be available for a larger area if that larger area can fulfill the statutory test. Garden or grounds will include any enclosed land surrounding or attached to your dwelling house and serving chiefly for ornament or recreation.
Not all land is entitled to relief
However, not all land you hold with your dwelling house is treated as the garden or grounds of that residence. You are not entitled to relief for land let or used for a business, for example, surrounding farmland. Similarly, land which at the date of disposal has been fenced or divided off from your garden for development, or has been developed or is in the course of development (for example, excavations underway for foundations, roads, services, and so on) won’t qualify.
Fencing off land for equestrian purposes which is intended to be retained may point to land unfenced but being sold for development being regarded as part of the permitted location and therefore exempt from CGT. This is but one of many opportunities to reduce the impact of CGT on your garden and grounds when you sell your main residence.
Payments on account and 30-day returns
Legislation has been enacted to change reporting obligations for residential property gains chargeable on UK resident individuals, trustees, and personal representatives. Also introduced is a requirement to make a payment on account of the associated CGT liability.
For disposals made on or after 6 April 2020:
- a tax return is required if there is a disposal of UK land on which a residential property gain accrues
- CGT is required to be computed on the reported gain in the tax return.
The return needs to be filed and the CGT paid within 30 days of the completion date of the property disposal.
Avoiding penalties and interest
Where CGT is payable, you will need to get focused on calculating the gain either in the run-up to the disposal or immediately after the sale, as late filing penalties and interest will apply in cases of not making the return or failing to pay within the 30 days allowed.
Good records will need to be kept to calculate the gain, for example, the purchase price, subsequent acquisitions, any improvements expenditure, and incidental professional fees. It may also be necessary to instruct a valuer to assist in calculating the gain and any apportionment between permitted area and non-permitted area.
If you would like to discuss these changes to Capital Gains Tax on gardens and grounds, and how they may affect you, please get in touch.
Contributed by Stuart Ritchie