While there may be some relief from capital gains tax (CGT) when selling your home – namely private residence relief (PRR) – a recent case (Phillips v HMRC 2020 UKFTT 381 TC) has raised the difficulties that some homeowners can experience when selling their house, which includes a large garden.
What is PRR?
I previously blogged about capital gains tax and private residence relief. In summary, while capital gains tax may be due when disposing of an asset, when selling your main private residence, you may benefit from PRR which means no capital gains tax will be due to be paid.
Can PRR apply to the value of my garden?
It is possible to claim PRR if you are selling part of your private residence, or part of your garden grounds/land. Any land connected with a private residence is automatically exempt from up to 1.2 acres (0.5 hectares) in total. If the land exceeds 0.5 hectares it is necessary to demonstrate that the excess land is required for the enjoyment of the property.
What happened in Phillips v HMRC?
Facts: Mr and Mrs Phillips sold their home (which included five bedrooms, three bathrooms, a garage, a one bedroom cottage and a swimming pool) which also included grounds amounting to 2.3 acres/just under one hectare, to a developer. They did not declare the sale for CGT purposes as it was their private residence, so PRR would apply. However, HMRC reviewed the disposal and in particular the size of the grounds which exceeded the CGT threshold mentioned above.
HMRC's decision: HMRC decided that the property was not of a size and character that required gardens or ground of more than 0.5 hectares, and CGT was ultimately due to be paid on the disposal. Mr and Mrs Phillips appealed this and stated the grounds were required for the reasonable enjoyment of the property and PRR should apply to the whole value of the property and grounds.
First Tier Tribunal's decision: The First Tier Tribunal (FTT) considered previous case law and considered factors such as comparable properties, the size and value of the house and buildings as well as the nature of the location of the property. The FTT judges ultimately decided that the whole of the garden and grounds was required for the reasonable enjoyment of the private residence and PRR should apply.
This case provides some additional case law in this area and offers further interpretation of the legislation and applying the various factors to the circumstances. This subject also raises the importance of instructing an appropriate surveyor and obtaining a surveyor's report and opinion.
There are a number of issues concerning CGT and PRR, including the application of PRR if you are a non UK resident and own property in the UK, and the recent changes to CGT reporting and payment rules. For more information, please do not hesitate to contact any of the members of our personal team.