Could the size of your garden mean an unexpected tax bill?

John Williams explains how the UK’s complex capital gains tax rules could lead to unexpected bills even when selling your family home. Some tax may be due if there’s a large garden or grounds involved.
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Published 30 October
5 mins

The UK has one of the most complex tax systems in the world. It’s something the HM Revenue and Customs (HMRC) has been conscious of since 2008, at least, when, after five years of advertising campaigns, the non-ministerial department dropped its front man Adam Hart-Davis and the phrase “tax doesn’t have to be taxing” after Hart-Davis was widely quoted as saying tax was taxing1.

An example of this complexity is a tax that has been subject to more changes than most in recent years: capital gains tax (CGT)2. Since its introduction in 1965, its rate has fluctuated between 10% and 40%3. The lowest level was introduced in 2016, as part of a two tier scheme with rates of 10% and 20%, with the exception of residential property where the rates are 18% and 28%. Your principal private residence should be exempt from CGT.

The level paid depends on what tax band you fall into when liable for the tax. You are also entitled to a capital gains tax allowance in the 2020-21 tax year of £12,300. This is the amount of profit you can make from the sale of an asset this tax year before any tax may be due. If your assets are owned jointly with another person, you could use both of your allowances, which can effectively double the amount you can make before CGT is generally due. If you are married or in a civil partnership, you are free to transfer assets to each other without any CGT being charged. It’s also worth noting that if you don’t make full use of your CGT allowance in a tax year, you aren’t allowed to carry it forward to the next. 

However, there is a potential trap on the disposal of your main residence. This is to do with the relief typically applied to your main residence, i.e. principal private residence (PPR) relief4. For this relief to apply, you have to meet all of these HMRC criteria:

  • The ‘dwelling house’ has been your ‘only’ or ‘main residence’ throughout ownership
  • You have not been absent during ownership for more than an allowed period of absence
  • The ‘garden or grounds’ including the buildings on them are not greater than the ‘permitted area’
  • No part of your home has been used exclusively for business purposes during ownership
  • You did not buy it ‘just’ to make a gain.

While each of these criteria is worthy of further detail, it’s the point about gardens that I wanted to focus on today and, specifically, the term ‘permitted area’.

There has always been a desire for many people to move to rural locations, but the current pandemic has encouraged more people to reconsider their location, with many opting to sell London houses, and sometimes second homes at the same time, to allow them to buy somewhere with more space – both inside and out. Many of these properties are in more rural locations and, as such, come with much larger gardens.

What are the consequences for PPR relief?

At a basic level, buying a home with land – including the land the house sits on – that does not exceed half a hectare (or just under 1.25 acres), should mean that PPR relief is available in the future – notwithstanding any further changes of course.

And there are cases where larger properties can benefit from the relief too, given the size and character of the house should be taken into account. This relief is easier to seek if you are in an area where you are surrounded by other houses with similar sized gardens, although a recent ruling by the First-tier Tax Tribunal – the fact-finding court in which you can challenge HMRC decisions – sets a precedent in Phillips v HRMC to allow for other considerations to be taken into account as well5, e.g. the nature of the property’s location.

For tax purposes, it is also important what purpose the land serves. The current wording of ‘garden or grounds’ focuses on land, either surrounding or attached to your dwelling house, that is primarily there for ornament or recreation. In the case of a larger or historic house, the permitted area should increase if the land allows ‘for the reasonable enjoyment of the dwelling house as a residence’.

While those with a large garden may now be breathing a sigh of relief, it is worth noting that just because the land you own is linked to your dwelling house does not mean it is always treated as the garden or grounds of that residence. For example, the 2001 case of Longson v Baker7 set down the precedent that a horse and the land required to keep one is not necessary for people to enjoy a residence and, as such, that land does not qualify for PPR relief.

You are also not entitled to relief for any land that has been let (e.g. surrounding farm land) or that was used for a business (e.g. using outbuildings for a family business).

Exemptions to PPR relief also include any land that has been fenced off or separated from your garden for development, whether it has already been developed or is in the course of being developed.

So what can you do?

If the size of the land surrounding your main residence exceeds the threshold beyond which CGT can sometimes be charged, you should seek tax advice in advance of planning to sell the property.

You should also make sure that all other areas of your finances are structured in the best way to help you achieve your financial goals, with regular reviews undertaken to help you stay in line with the changing complexity of the UK tax system. While Nedbank Private Wealth doesn’t provide tax advice, we do work closely with clients’ tax and legal advisers – or can help people find an adviser – to help clients to develop a financial plan to manage their family wealth, both now and in the future. This is useful given ignorance and/or a lack of understanding are not valid excuses7 as far as the authorities are concerned.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how wealth planning can help them achieve their financial goals and objectives, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help you with wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.

Sources: Nedbank Private Wealth and (1) BBC; (2) Financial Times; (3) The Telegraph; (4) UK Government; (5) STEP; (6) HMRC; and (7) British and Irish Legal Information Institute.

 

Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the author

John Williams

John Williams

John heads up the wealth planning proposition for the international business. He works with clients and their families, in tandem with their professional advisers, to ensure they have a clear financial plan in place to achieve their financial objectives. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.

 

John has over 25 years of advisory and management experience, working for global organisations providing solutions to a wide variety of UK and international clients. He joined from Credit Suisse UK where he was head of wealth planning for five years. He has also held similar senior roles at Barclays and UBS.

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