CGT – Understanding the extent of Private Residence Relief
Richard Higgs, partner in our Commercial Property Team, considers the applicability of the Private Residence Relief for Capital Gains Tax to a sale of garden land where the house is retained.
The gain made on the sale of real estate is generally taxable for the purposes of capital gains tax (CGT). However, upon the disposal of an individual’s only or main residence, there is a well-known relief available, known as private residence relief (PR relief). In short, where a dwelling-house (or part of a dwelling-house) has been an individual’s only or main residence at some time during his period of ownership and it was not acquired for the purpose of realising a gain on the disposal, PR relief may be available.
In one recent case, we were asked to advise upon whether PR relief was available on the sale of garden land to a developer. The house, for the time being was to be retained, with a large part of the garden being sold.
Section 222 of the Taxation of Chargeable Gains Act 1992 sets out the main provisions relating to the availability of PR relief. Subsection (1) sets the parameters of PR relief as applying to the disposal of:
“(1) (a) a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.”
It is subsection (b) that contains the less well known reference to a disposal of gardens or grounds, separately from a dwelling-house, as being able to qualify for PR relief. The reference in subsection (b) is further clarified in subsections (2), (3) and (4):
(2) ‘Permitted area’ is defined (subject to (3) and (4) below) as an area (inclusive of the site of the dwelling-house) of 0.5 of a hectare (5,000 m2).
(3) Where the area required for the reasonable enjoyment of the dwelling-house (or of the part in question) as a residence, having regard to the size and character of the dwelling-house, is larger than 0.5 of a hectare, that larger area shall be the permitted area.
(4) Where part of the land occupied with a residence is and part is not garden or grounds, then (up to the permitted area) that part shall be taken to be within subsection (1) which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the residence.
In our example, the total area of the property, including the house and its large garden was around 0.5 of a hectare. It was therefore possible for the client to comfortably sell off around half of the garden to the developer and claim PR relief.
Had the total area of the house and its grounds and garden been larger than 0.5 of a hectare, then PR relief would have been available on up to the permitted area (usually 0.5 of a hectare) with the remainder (on a pro rata basis) being subject to CGT in the usual way – unless the extension to the permitted area referred to in subsection (3) above was to apply.
In order to ensure that PR relief is properly applied, we recommend that anyone proposing to dispose of land:
• obtains specific legal advice especially if the dwelling house is being retained or there may be a series of disposals; this article is only intended to highlight the issues in a general way and is not intended to be relied upon;
• instructs a surveyor to accurately measure the land to create a proper paper trail to ensure that HM Revenue and Customs are less likely to be able to challenge the application of PR relief; and
• takes tax advice from an accountant as to the CGT implications of the disposal to ensure that the transaction is properly notified and is dealt with in as tax-efficient a manner as possible.
For further information on the subject matter of this article or if you have any queries with regard to the disposal of land for development, please contact Dean Bickford, the leader of our “development” team or the writer, Richard Higgs.