The case concerned the application of Principal Private Residence Relief (“PPR relief”) on the sale of their home by a husband and wife. Generally, homeowners do not pay CGT on the sale of their home because of the availability of PPR relief. However, the rules can be complex in certain circumstances, one of which is if the garden and grounds are particularly large.
The legislation provides that gardens and grounds up to 0.5 of a hectare (the “permitted area”) are eligible for relief, including the site of the house. However, there is a separate provision which allows relief on gardens and grounds in excess of 0.5 of a hectare when the area is required for the “reasonable enjoyment” of the property as a residence, having regard to the size and character of the house.
Ultimately, we were successful in proving that the whole of our clients’ garden and grounds (which were 0.94 of a hectare in total) were indeed required for the reasonable enjoyment of the property, having regard to its size and character. A synopsis of the arguments and key facts are set out below and may be of particular interest to those who own, or who have clients who own, properties with large gardens and grounds.
Whilst the facts of the case are specific to our clients, the victory before the Tribunal demonstrates that might be scope to challenge HMRC’s assessments to CGT on the disposal of such properties and that CGT assessments should not necessarily simply be accepted without exploring the potential availability of PPR relief.
The dispute in this case was exclusively in relation to what constituted the permitted area.
The property in question was a detached period property with three reception rooms, five bedrooms and three bathrooms (subsequently converted to four bedrooms and four bathrooms). It also had a separate three-car garage, a one-bedroom cottage, a swimming pool and substantial gardens. The total plot comprised some 0.94 of a hectare i.e. almost double the statutory limit. The property is located in Bentley Heath, a semi-rural area south east of Birmingham city centre and close to Solihull.
The property was sold by our clients, reluctantly, in 2014 to developers, after neighbouring fields surrounding properties were all sold for development such that they were effectively living in the middle of a building site.
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HMRC’s view was that the only the statutory 0.5 of a hectare should be allowed as the permitted area, and they raised assessments on our clients for CGT liabilities relating to the excess. We appealed to the Tribunal on behalf of our clients following lengthy discussions with HMRC and unsuccessful attempts to persuade them to compromise.
HMRC’s key argument at the hearing related to the fact that the developer to whom the property was sold built a number of houses on the garden and grounds but retained the original house and built a wall around it. The house was then sold with a total plot of 0.1 of a hectare. They argued that if someone were willing to buy it with a smaller garden, the 0.94 of a hectare plot must not be “required”.
They also placed significant emphasis on the world “required”, and contended that the test in the legislation is whether the purchaser would require the garden and grounds for the reasonable enjoyment of the property, not merely that it would be preferred.
In response to HMRC’s argument in relation to the property being sold to a developer with a 0.1 of a hectare plot, Claritas argued that it was correct to consider what their clients sold, not what the buyers of the “new” property bought. Whilst it was clear that somebody was happy to purchase the property with a smaller garden, our argument was that the character of the property had been wholly changed by the surrounding development, and it was effectively not the same property as the one our clients disposed of.
We also pointed out that context is essential in determining what is “required”. Strictly speaking, no house in the world needs a garden at all, but nobody would expect a stately home to have no garden, just as nobody would expect a small, terraced house to have extensive gardens and grounds. It was argued that the property in question, taken in context of its size and character and its setting, would require substantial gardens and grounds for its reasonable enjoyment.
One of the other key arguments was in relation to the purchase of the property by our clients in 1996. At that time, the vendor tried to sell the property with just 0.3 of a hectare of grounds and retain the rest of the land to sell for development. However, none of the potential purchasers would buy the property without the inclusion of the full 0.94 of a hectare plot. This, in our view, demonstrates that for the land to reasonable enjoyment of the property, the full garden and grounds were objectively required by any potential purchaser of the property, not specifically our clients personally.
Both parties presented expert witnesses to support their cases. HMRC’s witness was a chartered surveyor who worked in the HMRC Valuation Office Agency. Claritas called upon a local estate agent and chartered surveyor, John Shepherd, who ran a successful estate agency business and worked in the local market, particularly in relation to high value properties, for nearly 50 years and was involved in the sale of the property to our clients.
The role of the expert witnesses was to present appropriate comparator properties to support their views of what the permitted area should be.
HMRC presented a number of comparator properties in the locality which were sold with much smaller gardens to attempt to demonstrate that most properties in the area do not require gardens and grounds in excess of 0.94 of a hectare for their reasonable enjoyment.
Mr Shepherd presented different character properties which were sold with similar or larger gardens than the property in question to demonstrate that, in the locality, houses of such character would be expected by a typical purchaser to come with substantial garden and grounds.
After carefully considering all of the submissions and evidence, the Tribunal concluded that the whole of the 0.94 of a hectare plot was required for the reasonable enjoyment of the house and so PPR relief should be available to our clients in full on the disposal. The key reasons for their decision were as follows:
They agreed with Claritas’ views on the importance of applying context, and that the setting of the house and its size and character were proportionate to the size of the garden and grounds in this regard.
The Tribunal’s view was that the properties presented by Mr Shepherd and Claritas were more appropriate comparisons to the property in question. The houses themselves were of similar character and, whilst larger than the property in question, the gardens and grounds were all of a similar proportion in relation to the property, and were all in similarly semi-rural settings, surrounded by fields. In contrast, the Tribunal stated that the properties presented by HMRC were much smaller and were in more developed, urbanised settings. They agreed with our argument that these properties would appeal to a different market of potential purchasers than the properties presented by Claritas.
The Tribunal also noted from aerial photographs provided in the submissions that the 0.94 of a hectare plot, at the time of the sale, had a natural border formed by trees around the perimeter. HMRC’s expert witness had earlier stated that the existence of a natural border would be a factor for HMRC in determining whether an area in excess of 0.5 of a hectare may be permitted for PPR relief.
They also took into account the fact that, when our clients acquired the house, they, and all other potential purchasers, had insisted on buying the full 0.94 of a hectare plot rather than a 0.3 of a hectare plot as proposed by the vendor. This was therefore a “requirement” of the purchaser rather than a preference.
Finally, the Tribunal agreed with Claritas that the property is of a completely different character following the development of the surrounding land to the property as sold by our clients pre-development.
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11 January 2021
9 December 2020
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