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Property marginally exceeds permitted area 0.5ha

How to determine capital gain on property that marginally exceeds 0.5 hectares

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My wife and I bought a property 20 years ago as joint owners that consists of a large house, garage and separate small bungalow which all sits within 0.558ha adjacent to a paddock of 1.288ha. All the land 0.558ha and 1.288ha was purchased on the same deeds. The house was built in 1929 and the bungalow before the Town and Country Planning Act 1947, subsequently the local council indictaed that there are no restrictions on the use of the bungalow as a separeate dwelling. The garage is used by the house and is situated between the house and bungalow. The house is 13 meters away from the bungalow and the garage is 5 meters away from the bungalow. There is a single drive, shared septic tank and a shared biomass boiler that is located within the garage. In 2012 the oil boilers in the house and bungalow were end of life and replaced by a single wood pellet biomass boiler that provides hot water and heating needs to both properties. There is an arieal photograph believed to be taken in 1973 that shows that about 0.08ha of the house gardens was used to grow fruit/vegtables as the previous owners had a gardener/cook within the bungalow. That area is now lawn and flowerbeds and instead the bungalow is rented out. We have lived in the house for all of the time and have no other property or let any other properties. As joint owners the bungalow rental income has always been declared within our Self Assesment tax returns. The house and bungalow each have their own council tax bands.

After reading various HMRC manuals my understanding is the following:

[1] CG64240 indicates "In Batey v Wakefield (55TC550) it was established that a dwelling house can consist of more than one building and can include an ancillary building which is itself a dwelling house."

That principle rasied conflicts with other cases where CG64240 further indicates "The principles laid down resolved the conflicts in the preceding cases by setting a clear test for identifying the entity making up the dwelling house. This is that no building can form part of a dwelling house which includes a main house, unless that building is appurtenant to and within the curtilage of the main house. The application of this test is explained at CG64260."

[2] CG64260 indicates the following "If a building is appurtenant to and within the curtilage of the main house, generally speaking it will form part of the entity of the dwelling house." and "Where a building has a residential purpose but is not appurtenant to and within the curtilage of the main house, it will still qualify for relief if it lies within the permitted area of the dwelling house. This is because buildings are legally part of the land on which they stand so if the building is within the permitted area it will also be covered by relief. So you should not raise enquiries in cases where the total garden and grounds do not exceed the permitted area unless you are aware that a building has been disposed of which was not part of the dwelling house and which did not have a residential purpose."

My understanding is that the bungalow is appurtenant to and within the curtilage of the main house nevertheless the entity of the dwelling house being 0.558ha is greater than the permitted area of 0.5ha.

[3] CG64807 indicates "Without the benefit of planning permission however, garden land may be of little value. Where a dwelling house and its garden and grounds are disposed of, and the garden and grounds only marginally exceed 0.5 hectares, it may be that the gain accruing on the land outside the permitted area will be small and may not be worth pursuit."

Finally, my questions.

My understanding is that the paddock of 1.288ha will incur capital gain when we sell the property, however I am not sure if our permitted area marginally exceeds 0.5ha. Clearly it exceeds 0.5ha but is it marginally. At the entrance to the property the shared drive is about 50 meters in length and at the entrance are hedges either side of the drive. Using Google maps I can meassure that the area of land occupied by those hedges can easily equal 0.058ha that being the amount over 0.5ha. All the land sits within a World Heritage Site and Conservation Area and as such my understanding is that it would be almost impossible to obtain planning permission within the excess of 0.058ha.

When selling the property can we simply indicate on our Self Assessment tax returns our reasoning as above, i.e. determine the capital gains for the paddock but explain that we beleive that the 0.558ha only marginally exceeds the permitted area of 0.5ha which would most likely be agreed on by the Valuation Office Agency if that was needed. Furthermore, I am unsure how we would value the excess 0.058ha and as CG64807 explains it "may not be worth purpsuit" as we are within a World Heritage Site and Conservation Area rendering the land of little value because planning permission would be diffiuclt.

Replies (18)

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Psycho
By Wilson Philips
17th Jul 2020 12:07

Did you read CG64818?

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Psycho
By Wilson Philips
17th Jul 2020 12:07

Did you read CG64818?

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Psycho
By Wilson Philips
17th Jul 2020 12:07

Did you read CG64818?

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Psycho
By Wilson Philips
17th Jul 2020 12:07

Did you read CG64818?

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Psycho
By Wilson Philips
17th Jul 2020 12:09

Did you read CG64818?

In case you didn’t hear me the first (or second, or third, or...) time

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Replying to Wilson Philips:
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By Tax Dragon
17th Jul 2020 12:24

Did you read (even once) that the bungalow was let?

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Replying to Tax Dragon:
Psycho
By Wilson Philips
17th Jul 2020 12:36

I did but kind of gave up afterwards. I wasn’t particularly concerned about what’s being sold, just making the point - in case it had been overlooked - that an area greater than 0.5 Ha isn’t necessarily fatal.

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Replying to Wilson Philips:
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By Tax Dragon
17th Jul 2020 12:45

Wilson Philips wrote:

I... kind of gave up afterwards.

TBH me too. This is not an advice forum, after all.

But there's an occupation test and I would guess that the bungalow, having been let, fails that test so is not within the permitted area. I may be wrong. I ain't about to look it all up. This is not an advice forum, after all.

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Replying to Wilson Philips:
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By justretired
17th Jul 2020 12:39

Appreciate the multiple posts as I am going a bit deaf at least my wife says so.

Anyway, I have read CG64818 and agree "It is the responsibility of the Valuation Office Agency to determine the extent of the permitted area.". However, I also referred to CG64807 which identifies risks where "garden and grounds only marginally exceed 0.5 hectares".

That was largely my question, i.e. how likely would HMRC consider that 0.558 ha only marginally exceeds 0.5 ha while also considering that CG64807 indicates

"Without the benefit of planning permission however, garden land may be of little value. Where a dwelling house and its garden and grounds are disposed of, and the garden and grounds only marginally exceed 0.5 hectares, it may be that the gain accruing on the land outside the permitted area will be small and may not be worth pursuit."

Furthermore, because of our location within a World Heritage Site and Conservation Area, HMRC may consider 0.558ha only marginally exceeds and it would not be worth pursuit.

Essentially, what is "marginally exceeds" and how would you value the excess considering it's location or simply put how likely would HMRC pursue this if I explained our situation.

If consensus is that HMRC are keenly interested in this and the Valuation Office Agency disagreed with a permitted area of 0.558ha how is the excess valued.

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Replying to justretired:
Psycho
By Wilson Philips
17th Jul 2020 12:54

Others will correct me if I am wrong here but I would not have thought that you value the excess separately - value the whole area and the excess part will simply be the apportioned amount.

Eg if the land in your case is worth £100k the excess will be valued at £10.4k.

But subject to the above point about the bungalow and whatever land attaches to it should probably be considered a separate asset, meaning that you almost certainly don’t have to worry about the area of land being sold with the main house.

As suggested, you need to sit down with an adviser and go over the facts. It would be foolish to rely on ‘advice’ given on a free-of-charge internet forum.

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My photo
By Matrix
17th Jul 2020 12:17

You don’t say if you are selling it all at once and if there are separate council tax bills for each dwelling.

You would need to include it on a CGT form within 30 days of sale and also on the self assessment. On both I would include your view on why the permitted area can be exceeded. How will you allocate the purchase and sales price to the dwellings and the paddock, will you get your own valuation and ask the Valuation team to review?

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Replying to Matrix:
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By justretired
17th Jul 2020 12:54

Thanks, they are good questions.

We are not thinking of selling for a few years however I am just trying to understand the process. When we do sell it will be all at once as we would plan to downsize. There are also separate council tax bills for each dwelling which I lightly touched on a "The house and bungalow each have their own council tax bands."

I was aware to report this on the SA and CGT form within 30 days but had omitted that in the post. Nevertheless, it is good for reference/completeness later on.

Regarding the purchase and sale of the dwellings and the paddock, I simply thought I would get a valuation for pasture land in our county for the size of the paddock whereby that valuation would also indicate the gain of the paddock over 20 years or so.

The gain incurred on the paddock would then reported as capital gain split evenly between my wife and I as joint owners. The dwelling house and ancillary buildings would fall under Principal Private Residence Relief (PPR) with the caveat that the entity marginally exceeds 0.5ha.

By "Valuation team" I assume you mean the Valuation Office Agency. I hadn't thought about getting them to review the gain on the paddock but will assess that if the paddock or pasture gain for our county is a sizeable gain.

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Replying to justretired:
Psycho
By Wilson Philips
17th Jul 2020 13:53

justretired wrote:
The dwelling house and ancillary buildings would fall under Principal Private Residence Relief (PPR)

Er ...

"the bungalow is rented out"

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Replying to justretired:
paddle steamer
By DJKL
17th Jul 2020 16:01

Before giving up on the paddock with the main house I would carefully consider the character of the property.

The fact you mention conservation area and that the whole historically required a gardener's cottage might give weight as evidence that the paddock was necessary to the character of the main house.

I think the subsequent use of the cottage has likely removed it from being part of the whole, but the house and its policies excluding the cottage and its garden may still be considered as a necessary whole re its character/enjoyment.

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Replying to DJKL:
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By justretired
18th Jul 2020 10:56

Many thanks for this input as I feel that one could suggest that the paddock was necessary to the character of the main house. As such, we won't give up on that.

On a side note and for the benefit of others that replied, I really didn't mean to abuse this website as I did read the Terms of Use before signing up. Specifically I am aware of the "No reliance on information" which says "The content on our site is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our site."

In that regard when we do sell the whole I will seek professional or specialist advice. My purpose for posting was simply to get a better understanding on how to navigate what could be a complex sale.

I now tend to think the the bungalow (the ancillary building which itself is a dwelling house) should be able to form the entity of the main dwelling house, i.e. all buildings within the 0.558ha. Furthermore, I now feel it's not worth giving up on the paddock and at the appropriate time would suggest that the whole 0.558ha and 1.288ha are considered as the permitted area for reasons that have been discussed. I accept that this may be challenged and that the Valuation Office Agency may need to assist however from a historical perspective I feel there is a strong case.

However, I also now feel that because the bungalow was let for nearly all the time, i.e. we didn't let for the first 6 months and over the 20 years there have been a succession of tenants that required letting gaps say 8 x 1 month gaps, that PPR will not fully apply for the bungalow if at all.

Nevertheless, after reading up on Lettings Relief, applicable from April 2020 onwards, I feel that there could be a case for joint Lettings Relief on the bungalow, i.e. Lettings Relief will only apply in circumstances where the owner of the property is in shared occupancy of the tenant.

In that context and working on the principal that "In Batey v Wakefield (55TC550) it was established that a dwelling house can consist of more than one building and can include an ancillary building which is itself a dwelling house." I feel one could argue that shared occupancy can be applied.

Please note that there is single drive, shared septic tank and drains, one water meter servicing the house and bungalow, i.e. not separate water meters, and since 2012 a shared biomass boiler that performs district heating to the house and bungalow, i.e. there are several aspects of shared occupancy between the house and bungalow which could enable Lettings Relief. My understanding is that the changes to Lettings Relief largely affects buy-to-let properties where the landlord has had no occupancy which arguably is not our case.

Finally, I need to research some more on how to value the bungalow. One thought is to use the rateable value range from Q2 1991 together with the Nationwide House Price Index calculator to determine its value in 2000, when we bought everything on one title deed. That would offer a purchase valuation price. When we sell, the same approach could be used to determine the gain, i.e. using the derived purchase valuation price at 2000 to whatever the sale date is.

Anyway, apologies for the verbose detail. It has helped me to understand how to approach this in a few years time. Thanks for all the input.

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Replying to justretired:
RLI
By lionofludesch
18th Jul 2020 11:18

justretired wrote:

I now tend to think the the bungalow (the ancillary building which itself is a dwelling house) should be able to form the entity of the main dwelling house, i.e. all buildings within the 0.558ha. Furthermore, I now feel it's not worth giving up on the paddock and at the appropriate time would suggest that the whole 0.558ha and 1.288ha are considered as the permitted area for reasons that have been discussed. I accept that this may be challenged and that the Valuation Office Agency may need to assist however from a historical perspective I feel there is a strong case.

However, I also now feel that because the bungalow was let for nearly all the time, i.e. we didn't let for the first 6 months and over the 20 years there have been a succession of tenants that required letting gaps say 8 x 1 month gaps, that PPR will not fully apply for the bungalow if at all.

Nevertheless, after reading up on Lettings Relief, applicable from April 2020 onwards, I feel that there could be a case for joint Lettings Relief on the bungalow, i.e. Lettings Relief will only apply in circumstances where the owner of the property is in shared occupancy of the tenant.

Good luck with the bungalow thing but the facts that you let it, has its own Council Tax band and that it's self contained will count against you.

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RLI
By lionofludesch
17th Jul 2020 23:24

Jeez. That's a helluva question.

Congratulations.

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By zebaa
18th Jul 2020 12:12

If it is 'a few years' before the sale, all the tax stuff could have changed totally by then. There has to be better ways to spend retirement than trying to sift through tax law.

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