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In this post, we will look at the details of how tax exemption works when it comes to a properties gardens or grounds. We will cover what pitfalls and opportunities these tax exemptions provide.
The exemption covers not only the house itself, but also the “permitted area” of the land around it.
Up to half a hectare (about 1.2 acres) of garden is allowed by statute, but a larger area may be included in the exemption if it is “required for the reasonable enjoyment” of the property “having regard to the size and character of the dwelling-house”.
The issue of what area of land larger than half a hectare is required for the “reasonable enjoyment” of your home has led to numerous tax cases being tried in the Courts, and it would be pointless to go into the details here as every case is different, but there is one particular point that is worth noticing:
Case Study: Sale of Part Grounds
Mr Grey and Mr Green live in similar large houses. Each house has a garden of 1.7 acres.
Mr Grey sells his house (and garden). There is some discussion with the inspector about whether the “extra” half acre (above the 1.2-acre limit) is “required for the reasonable enjoyment” of the property, but the inspector eventually concedes that it is, and the whole gain is exempt.
Mr Green receives an excellent offer to sell a half acre of his garden to a property developer.
He has read about CGT, so he knows that because he still owns the house, the exemption for the garden or grounds can apply to this sale.
He sells the land, and does not expect to pay CGT on the gain he makes.
The tax inspector does not agree, and says that CGT is due on the substantial gain Mr Green made on selling the half acre.
Mr Green objects that when his friend Mr Grey sold a similar house and land, it was accepted that the whole gain was exempt.
“Ah”, replies the tax inspector, “but the test must be applied to the exact circumstances of each sale, and to me, the very fact that you are prepared to sell that half acre while you remain living in the house may be prima facie evidence that the part disposed of was not required for the reasonable enjoyment of the dwelling house as a residence. So the exemption doesn’t apply to it”.
(The underlined words above are taken verbatim from HMRC’s own CGT Manual at paragraph CG64832).
Selling the Garden
Sometimes it is possible to sell part of your garden, perhaps to a property developer. If the total area of your garden before this sale is less than half a hectare (about 1.2 acres) then, assuming the house qualifies as your main residence, a gain on the sale of part of the garden will be exempt from CGT.
This only works if the house is your main residence at the time you sell the piece of garden.
Case Study – Sale of Part of Garden
Mary’s main residence has a garden of one acre. She is planning to sell the house, and she receives an offer from a developer to buy a half acre of the garden.
While she is still negotiating with the developer, she receives an offer for the house and the remaining half acre of garden, which she accepts.
Mary exchanges contracts to sell the house on 1 March 2020, and the house is conveyed to its new owner on 21 March 2020. This gain will be exempt from CGT, because the house was Mary’s main residence.
She finally agrees terms with the developer on 1 April 2020, and sells him the half acre. The capital gain on this sale is NOT exempt from CGT, because at the time of the sale, the land was NOT part of the garden of her main residence (because she had already sold the house).
If only Mary had sold the garden to the developer first, and then sold the house, both gains would have been exempt from CGT.
NOTE: The date of a sale for CGT purposes is the date contracts are exchanged rather than the date the sale is completed. If, however, Mary had sold the garden on 10 March (after she had exchanged contracts to sell the house, but before she moved out of it when completion of the sale took place on 21 March) HMRC might have accepted that the garden was still part of her main residence on 10 March and the gain could have been exempt. Every now and again, dates really matter.
