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  • Katherine Bullock

Running to keep up – Main Residence Relief and a room with a view

Main Residence Relief (aka Principle Private Residence relief) is a familiar relief to most taxpayers. With a simple surface and complex undercurrents, it is often misunderstood. The relief applies to chargeable gains on the disposal by an individual of their main residence together with its garden or grounds up to the permitted area. The permitted area automatically includes 0.5 hectares (including the site of the house). However, TCGA 1992 s.222(3) provides: “Where the area required for the reasonable enjoyment of the dwelling house … as a residence, having regard to the size and character of the dwelling-house is larger than 0.5 of a hectare that larger area shall be the permitted area.”

"...HMRC’s attention...and they sought CGT in respect of the excess of the land over the 0.5 hectare limit..."

Traditionally the extension of the permitted area has applied to heritage properties, where there is something about the character of the house that warrants larger grounds. In the recent case of Leslie & Catherine Phillips v HMRC (TC07859), Mr and Mrs Phillip successfully claimed that this extension should apply to their property because of its rural location.

Mr and Mrs Phillips owned a large house in a rural area comprising almost an entire hectare of land. When they sold the property to the developer, it comprised a five-bedroom house, a three-car garage, a one-bedroom cottage, a swimming pool and substantial gardens. The property was surrounded by a road, allotments and a field. The disposal came to HMRC’s attention when they were reviewing SDLT records and they sought CGT in respect of the excess of the land over the 0.5 hectare limit.

The First Tier Tribunal decided that all the land was required for the reasonable enjoyment of the property. What was required for reasonable enjoyment varied depending on the location and the expectations of a typical purchaser of a property of that type. A suburban property or one in the heart of an urban centre would not be expected to include large gardens, but a buyer would reasonably expect a house in a rural area to include extensive gardens.

The Tribunal held that whilst the question of what was required must be answered as of the date of the disposal, the answer might depend on an assessment of the facts over the whole of the period of ownership rather than looking at a snapshot in time. In this context, the Tribunal relied on evidence that when Mr and Mrs Phillips had bought the property, no prospective buyer was prepared to purchase the house with the smaller garden then offered.

It is established that “required” means that without the additional land the property would be substantially deprived of amenities or convenience or serious damage would be done to the enjoyment of the property. It is not merely a case of whether the landowner prefers to have more land, or even whether the property would be worth less if its grounds were to be curtailed. Whether gardens in excess of 0.5 hectares are required for the reasonable enjoyment of the property is an objective test.

Both parties referred to the decision of Evans-Lombe J in the High Court in Longson v Baker [2001] STC 6 where the judge stated, “I am not permitted to take into account the particular requirements of the owner of the dwelling-house; it is the house to which I must look and not the wishes, desires or intentions of any particular owner of the house.” Both parties therefore accepted that the most meaningful comparables were those relating to similar properties in the immediate vicinity of the Phillips’ house. Whilst the Tribunal agreed, in their view it was necessary to take into account all of the relevant facts and evidence including factors other than comparable properties, as long as those facts did not relate to the subjective preferences of the owners of the particular property. In this case, the correct comparative properties were held to be ones that would appeal to purchasers who were looking for a larger house and more space. The Tribunal noted that there was a natural border formed by trees around the perimeter of the property which was one of the factors which might justify a permitted area in excess of 0.5 hectares.

Further the Tribunal decided that once it was accepted that one of the key elements in assessing the area of land required for the reasonable enjoyment of a property is a review of comparable properties, it was not legitimate to discount those properties (as HMRC sought to do) on the basis that they had not themselves been subjected to a similar PPR assessment. It would be impossible for a taxpayer to know whether there had been any discussions with HMRC in relation to the “permitted area” in respect of any potential comparator property, let alone what the outcome of those discussions might be.

What does this mean for PPR relief? The case is an interesting and useful illustration of the importance of context in deciding whether extended grounds are required for the reasonable enjoyment of the property. It is not open to HMRC to impose their view on what is or isn’t an acceptable size of garden and the setting of the property may be an important factor: a case of “Location! Location! Location!”


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