Generally speaking, where a property has been an individual’s main residence, then its disposal will attract Principal Private Residence Relief (PPR) and the gain will be exempt from CGT. PPR also applies to any land which is occupied by the taxpayer as the property’s ‘garden or grounds’. ‘Garden and grounds’ is not defined by statute but it is interpreted quite widely. PPR will apply to up to 0.5 hectares of ‘garden and grounds’ without question but it can also apply to extra areas if it is required for the reasonable enjoyment of the dwelling as a home, taking into account the size and character of the dwelling.
Given that many people will therefore trigger a gain on their property because they do not benefit from full PPR, they need to decide at what rate to apply capital gains tax in relation to the portion which is not exempt. This will depend on whether normal capital gains tax rates apply (10% and 20%) or whether the Residential Property capital gains tax rates apply (18% and 28%). Logically you may think that if land is ‘not good enough’ for PPR then it will ‘not be good enough’ for residential rates either – but this is not the case.
Residential rates apply to any dwelling that is suitable for use as a dwelling. They also apply to any land that is at any time, or is intended to be, occupied or enjoyed with a dwelling as a garden or grounds.
Unlike the criteria for PPR, where land must be required for the reasonable enjoyment of the dwelling-house, there is no limit to the amount of land that can be considered grounds for general CGT purposes. This means that we can end up with the slightly unhappy result of non-PPR gains being subject to higher residential rates of capital gains tax.
Forbes Dawson view
Often any ‘non-PPR’ gains will not be significant because the gain on the land can be argued to be smaller, but in other cases the opposite will be true (such as where the house and land is sold to a property developer for a high value). Here, it will usually be advantageous to argue that any gain relates to land that is not only outside of the ‘permitted area’ but is not even ‘garden and grounds’. For example, depending on circumstances, it may be possible to fence off the additional land prior to sale and put it to some other use (for example a housing developer may want to subject it to further investigations as part of its project). Any approach that is taken or conclusion that is ultimately made should clearly be communicated to HMRC in an appropriate tax disclosure.
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