A Character Study: PPR Relief and Gardens & Grounds
On the sale of a house that you have lived in as a main residence, Principal Private Residence (PPR) Relief is typically available to reduce the gain by reference to your ownership period and the length of time that the house has been occupied as your main residence.
PPR Relief applies to both the site of property and its surrounding gardens and grounds, provided that the total area does not exceed 0.5 hectares. Should the site exceed 0.5 hectares, relief may still nevertheless be available if it can be demonstrated that the larger area is required for “the reasonable enjoyment of the dwelling house . . . as a residence, having regard to the size and character of the dwelling house”.
In the recent case of Leslie and Catherine Phillips v HMRC (2020), the First-Tier Tribunal (FTT) were asked to determine a property’s permitted area for PPR Relief purposes, taking into account evidence provided by both Mr & Mrs Phillips (the Appellants) and HMRC. This case therefore provides a useful demonstration of the types of factors that can be relevant when considering the extent of a permitted area of a property.
- The Appellants bought a property in 1997 which had three reception rooms, five bedrooms, a garage for three cars, a one bedroom cottage, a swimming pool and substantial gardens. Together with the gardens, the property extended to 0.94 of a hectare.
- In light of planned property development surrounding the house, the property was sold to a developer in 2014.
- The Appellants did not report the gain on their tax returns on the basis that the entire gain qualified for PPR Relief.
- HMRC issued discovery statements to each of the appellants for Capital Gains Tax on the part of the purchase price attributable to the balance of 0.44 of a hectare.
- Mr and Mrs Phillips appealed those assessments on the basis that the whole area of 0.94 hectares is, having regard to the size and character of the property, required for the reasonable enjoyment of the property and therefore formed part of the permitted area to which PPR Relief applies.
It was accepted that the whole of the garden grounds were clearly enjoyed together with the house at the date of disposal – the question was whether an area of more than 0.5 hectares was required for the reasonable enjoyment of the house.
Both HMRC and the Appellants looked at similar properties located nearby as an indication of the size of grounds required for the enjoyment of the house:
- HMRC put forward three properties which were said to be comparable to the property owned by the Appellants. Whilst they were close in location to the property, they were smaller and in more built-up locations. The area of grounds of each of these properties were significantly smaller than that of the property owned by Mr and Mrs Phillips, ranging from 0.09 hectare to 0.3 hectares. In HMRC’s view, this showed that a purchaser would be happy with garden and grounds which extend to less than 0.5 hectares. Whilst a purchaser might prefer to have larger grounds, these properties demonstrated that this is not something which would be required.
- The Appellants disagreed with the choice of properties identified by HMRC. The properties selected were completely different in their character and would appeal to a different category of purchaser being smaller, less expensive, and in more built-up areas. Mr and Mrs Phillips instead put forward four properties which were said to be comparable, all within half a mile of the property and in a semi-rural location. Whilst the other houses were larger than the one owned by the Appellants, in proportionate terms the size of the houses when compared to the size of the garden/grounds were broadly in line with the property in question.
When considering the area of land required for reasonable enjoyment, it is necessary to take into account all of the relevant facts and evidence, which may include factors other than comparable properties:
- Before the Appellants purchased the property, it was originally marketed with approx. 0.3 hectares of grounds, representing only part of the garden. However, none of the potential purchasers would go ahead without being able to buy the whole of the garden.
- In 2006, there was a change to the local planning rules which enabled the development of the land around the property. With the prospect of new houses being built all around them, the Appellants reluctantly decided to sell their house to a property developer.
- The developer later sold the main house together with a new (but smaller) garage block which they had built, with the total area including the garden being 0.1 hectares. At this point, the property was surrounded by around 30 houses.
HMRC pointed towards the subsequent sale by the developer and argued that as the main house had remained largely the same as when it was sold by the Appellants and the plot was approx. o.1 hectares, this demonstrates that the garden and grounds of 0.94 of a hectare were not required for the reasonable enjoyment of the property.
The taxpayers disagreed with this analysis, and argued that by the time the property was sold by the developer the character of the property had fundamentally changed; the cottage and the swimming pool was not included and the house was surrounded not by fields but by other houses built by the developer. It had changed from being in a semi-rural setting to being in a suburban setting.
After weighing up all of the relevant evidence, the FTT found that the properties selected by the taxpayer provided a better comparison and held that the whole of the 0.94 hectares was required for the reasonable enjoyment of a dwelling house, and so qualified for PPR Relief in full. It was stressed that context is everything when considering the character of the house in question, and a purchaser of property in a suburban location would not expect a garden or grounds which are as extensive as that which might be expected by a purchaser in a more rural location.