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A client recently sold a barn which is situated in the garden of his main residence and can, therefore, be said to be in the curtilage of the residence.
The barn is on the edge of the garden and is considered to be mainly in the garden with a small part not in the garden. Barn and house were purchased as one transaction some years ago, together with another barn, a garage and some land. These latter have been sold and dealt with as chargeable capital gains tax disposals, because they were never considered to be part of the client's garden.
A client recently sold a barn which is situated in the garden of his main residence and can, therefore, be said to be in the curtilage of the residence.
The barn is on the edge of the garden and is considered to be mainly in the garden with a small part not in the garden. Barn and house were purchased as one transaction some years ago, together with another barn, a garage and some land. These latter have been sold and dealt with as chargeable capital gains tax disposals, because they were never considered to be part of the client's garden.
What factors need to be taken into account when considering whether there is a capital gains tax liability on the latest barn sale?
Query T16,604 — Haymaker.
Reply by 'Grover'
TCGA 1992, s 222 identifies two routes by which gains can qualify for the private residence exemption. Haymaker will have to clarify which, if any, is relevant to his client's barn.
The first leg of the exemption is for gains on the disposal of the whole or part of a dwelling house that has been the taxpayer's only or main residence. The second (s 222(1)(b)) covers land for 'occupation and enjoyment with that residence as its garden or grounds up to the permitted area'. The permitted area is one half of a hectare or larger if that would be reasonable given the size and character of the house. The two strands are expressed as alternatives and the Revenue accepts, in principle, that parcels of land may be sold whilst retaining the house.
The most straightforward approach for Haymaker would be to establish that the barn lies within the statutory permitted area. If the whole plot including the house and barn is half a hectare or less then the Revenue will accept the principal private residence relief claim on the barn (see its Capital Gains Manual at CG64262 and CG64815).
A larger plot makes the situation trickier. Haymaker needs to establish the extent of the house, which could even include the barn. However, just because the barn is in, or partly in, the garden will not automatically bring it within the curtilage of the house.
The abundance of case law shows that a taxpayer's main residence can consist of more than one building even if those buildings are not physically joined together.
The most recent authority on this issue is Lewis v Rook [1992] STC 171 which concerned the sale of a gardener's cottage 175 metres from the main house. The court applied the test of whether the cottage was 'appurtenant to and within the curtilage of' the main house, so that the two buildings together formed the taxpayer's main residence. The court held that they did not, but the 'Lady Rook test' was adopted in Revenue Interpretation RI75, apparently superseded by Capital Gains Manual, CG64236, et seq.
The statement is short on practical indicators of a composite residence, but confirms that the curtilage of the house will generally be less than that of the estate as a whole. Further, in order to be within the same curtilage, buildings need to constitute a single integral unit, being so 'intimately associated' that one forms part of the other. A close geographical link is important as is an absence of barriers, fences, roads, water, etc. between the two buildings.
Previous case law (Williams v Merrylees [1987] STC 445) found the single mains water and electricity supplies persuasive in determining whether the two buildings formed a single dwelling house, and came to the view that a lodge and main house 200 metres apart could constitute a single dwelling split into separate buildings with different functions. The way in which Haymaker's client has used the barn may have a bearing on the degree of association between the two buildings, and hence whether they are within a single curtilage. Otherwise, however, the Rook case and the subsequent Revenue statement have moved the position on from Williams v Merrylees and the Revenue is unlikely to be persuaded by matters of mains supplies and usage alone.
If the barn cannot be said to be within the same curtilage as the house, then it remains to be argued that it is part of the permitted area required for the reasonable enjoyment of the house. Being only partially in the client's garden, the barn may be only partially in the permitted area. The size and character of the house is taken into account in determining the extent of the permitted area; a rural location is more likely to warrant a larger area than an urban one and the current sale can be distinguished from the earlier part disposal in terms of location. On the other hand, the Revenue tends to argue that, if the barn is being sold separately, then it cannot be required for enjoyment of the house as a residence. Special circumstances, such as a forced sale for financial reasons or a disposal within the family, could countermand this line.
Although one suspects that there may be no difficulty if the house and barn were sold together, the Rook case, set against a backdrop of smaller modern plot sizes, has made it more difficult to get relief for sales of separate buildings. Haymaker will need to take a view, possibly with professional help, for his client's tax return. He must make adequate disclosure of the circumstances of the barn disposal and, recognise that, ultimately, the main residence relief claim may be referred to the District Valuer.
