The question of ‘gardens and grounds’ can have a substantial impact on tax liability upon estate purchase and sale, writes Claire Weeks
SDLT rates on residential property are at an all time high, with a top rate of 15 per cent on the slice of the purchase price exceeding £1.5 million (for additional homes purchased by individuals). By contrast, the maximum rate for non-residential property is 5 per cent. In the case of ‘mixed-use’ property, comprising both residential and non-residential elements, the lower rates apply to the whole purchase price resulting in a substantial saving.
The definition of residential property for these purposes includes a building that is suitable for use as a dwelling and ‘land that is or forms part of the garden or grounds’ of that building. The question for a purchaser of a house with land is therefore whether the land constitutes garden or grounds, such that the maximum rates apply to the whole purchase, or whether it goes beyond this so you have a mixed-use property, taxable at the lower rates. The latter will result in a substantial tax saving.
For example, on the purchase of a country estate for £10 million, the SDLT charge at the maximum residential property rates would be £1,413,750. If the non-residential rates apply, the charge is instead £489,500.
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This question was considered by the courts in the recent case of Hyman v HMRC 2019. The Hymans had bought a property with over 3.5 acres of land, including the garden and what was described as a ‘meadow’. They argued that the meadow was separated from the garden and house by a hedge and that there was a public bridleway across the meadow, so the whole transaction should be classified as mixed-use and SDLT payable at the lower non-residential rates, saving £34,950. Both HMRC and the judge disagreed.
The judge said that the ‘grounds’ of a house means land that is attached to or surrounding the house and occupied with the house. It is not necessary for the grounds to be used for ornamental or recreational purposes, they can be allowed to grow wild and separation by hedges of fences is not relevant.
Different facts can of course lead to a different result. For example, surplus land that is let for grazing sheep or horses or cutting hay is less likely to be treated as ‘grounds’ as are large tracts of fells, moorland and the like. In these cases, a taxpayer will have a much greater chance of paying the lower rates on the whole purchase.
Estate agents should also beware – whilst the brochure cannot determine the tax treatment, the judge in Hyman was clearly impressed by the fact that the property was presented as an integral whole.
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Individuals do not pay CGT on the disposal of a main residence (a saving of up to 28 per cent of the gain). This relief extends to the gain on so much of the garden or grounds as is ‘required for the reasonable enjoyment’ of the house. This is an objective question, so whilst a keen horseman might feel that a large area of paddocks is necessary to enjoy a house with an ‘equestrian character’, HMRC is unlikely to agree.
Photo credit: Aernoudts jean @Wikimedia Commons
Claire Weeks is counsel at boutique private client law firm Maurice Turnor Gardner LLP
