Gardening your way out of recession
Published: 03:05PM BST 28 Jan 2010
It exempts from capital gains tax "...any gain arising on the disposal of a person's principal private residence together with any land which a person has for his own occupation and enjoyment with that residence as its gardens or grounds up to the permitted area".
The permitted area is 0.5 hectares, but can be larger if it is required for the reasonable enjoyment of the residence.
PPR can be a valuable relief for anyone considering selling their home or garden. Whilst property development is currently at a very low ebb, it is likely that once the economy starts to improve there will be more interest in these types of arrangements.
Frequently, disputes can arise with HM Revenue & Customs (HMRC) where the garden or parts of the garden are sold. The disputes involved fall into a number of distinct categories.
Larger gardens
Where a garden is sold which is larger than the permitted area, it is likely that HMRC will dispute the part in excess of the permitted area as qualifying for PPR. Depending on the nature of the residence, it should be possible to show that even very large gardens can qualify if it can be shown they are required for the reasonable enjoyment of the property.
Where gardens or grounds of more than half a hectare are involved, it is better not to permanently divide off any part. Fencing off a separate paddock and screening it behind a hedge may result in that being lost for capital gains tax exemption. Similarly, renting off part of the land may well demonstrate that the relevant land was not required for the reasonable enjoyment of the residence.
Timing the garden sale
Relief is only available for sales of part of the land where that land is part of the land which a person has for his own occupation with that residence.
In a reported decision, it was held that land he 'has for his own occupation' meant the present tense, i.e. land which was still occupied as a garden for the house at the moment of sale.
Fortunately, HMRC does not take this point if the house is merely unoccupied before sale; for example, for up to the three years permitted before the relief on the house may be restricted. They do however take the point where the house is actually sold before the garden. HMRC also points out that even where the house is not actually sold, but merely unoccupied before the garden is sold, its practice of ignoring the concession does not apply if the 'garden has development value'.
It is essential, therefore, that wherever possible when a house and garden are sold separately, the house should be retained and preferably still occupied until after the sale of the garden. Any sales of the garden land after the house will be treated by HMRC as not within the exemption.
A further issue that can arise where it is proposed to sell the house and garden separately, is that there may be an argument that the garden was not required for the reasonable enjoyment of the house. In these circumstances it is generally better to sell the house and garden together.
Trading intention
A garden may sometimes have been acquired in stages before being sold off.
A point sometimes raised by HMRC is that the PPR exemption does not apply if the acquisition of the garden or part of it was made wholly or partly for the purpose of realising a gain from the disposal of it.
Whilst HMRC may be justified in arguing that the disposal of the garden is a trading transaction, the capital gains legislation itself contains no such rule. In a recent case Shoosmiths advised on, we successfully rebutted such an argument on the basis that the provisions only apply to the residence, and have no application to the garden or grounds, thus saving a substantial tax bill.
It is interesting to speculate for how much longer the PPR exemption can remain in its current form.
