Taxpayers’ two acre property escapes tax
A couple who sold their large house with over two acres of grounds persuaded the tax tribunal that the entire plot was in keeping with the property, and CGT relief should apply.
Mr and Mrs Philips appealed against discovery assessments (TC07859) seeking to charge £162,820 CGT on the disposal of their main residence, which was raised because of the size of the garden or grounds for the property exceeded 0.5 of a hectare.
The property sold
In 1997 when the property was purchased, the main house included three reception rooms, five bedrooms, and a garage for three cars. The property also included a one-bedroom cottage, a swimming pool and substantial gardens. After some renovation a bedroom had been converted into a bathroom resulting in the property having four bedrooms and four bathrooms. The entire property covered 0.94 hectares (about 2.3 acres).
The taxpayers reluctantly decided to sell their property in 2014 after there were changes to the local planning rules which enabled the development of the land surrounding their property, meaning they would be surrounded by new houses.
The discovery assessment
The taxpayers did not report the disposal of the property to HMRC on the basis that the entire gain was covered by principle private residence relief (PRR) for CGT.
Following a review of the stamp duty records in March 2017, HMRC concluded their investigation by issuing discovery assessments in October 2017, representing a gain on 0.44 hectares not covered by the PRR exemption. The taxpayers appealed against the discovery assessments on the basis the entire garden or grounds were required for the reasonable enjoyment of the house.
Principle Private Residence Relief
The CGT relief is available to individuals who are disposing a property which either is or has been their only or main residence. The relief can also extend to cover buildings, gardens, or grounds, which the individuals occupy and enjoy as part of their main residence (the “permitted area”).
The legislation dictates that the permitted area can automatically include an area including the site of the property of up to 0.5 hectares. If the area extends beyond that size, the relief can still be utilised if it can be demonstrated that it is in keeping with the size and character of the property, and that the area required is for the reasonable enjoyment of the property.
Steps to decision
HMRC has a five step approach when dealing with garden or grounds exceeding 0.5 hectare:
- Identify the dwelling house, which would all be covered by the relief.
- Determine the size of the garden or grounds which are enjoyed with the dwelling house.
- Taking into account the size and character of the dwelling-house, determine what part of the garden or grounds is required for the reasonable enjoyment of the dwelling-house.
- Establish the location of garden or grounds most suitable for occupation and enjoyment with the residence.
- The proceeds of disposal and the acquisition cost should be apportioned between the part of the property qualifying for relief and the part that would not.
The first tier tribunal (FTT) accepted the taxpayers appeal that the garden or grounds exceeding 0.5 hectares was required for the reasonable enjoyment of the dwelling-house. As a result, the discovery assessments were reduced to nil as full principle private residence relief (PRR) covered the gain arising from the disposal of their former main residence.
In order for the FTT to reach their decision, consideration was taken on comparable properties alongside the location, size and character of the property. The taxpayer property was located in a suburban area, whereby generally individuals would be looking for a larger house and more space similar to that of what the taxpayer had. The case demonstrated the importance of having an expert who knew the area and local market.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.