Date posted: 8th Mar 2021
If you survey most people, they would expect that they would not pay any tax on the sale of their main home, if the property has been their main residence throughout their ownership period.
However, does this “exemption” always apply?
It is probably less known that the “exemption” within legislation limits the size of the garden and grounds, that falls within the definition of a main residence. Therefore those with a large garden or grounds, could potentially face a tax charge upon the sale of their home.
What is allowed?
The legislation initially allows grounds up to the “permitted area” to fall within the main residence exemption and therefore be excluded from tax. The “permitted area” is set at 0.5 of a hectare which is around one and a quarter acres. Where the area is larger, the exemption can be extended, if “having regard to the size and character of the dwelling”, the additional land is required for the “reasonable enjoyment” of the property.
However, the onus of proof is very much on the taxpayer and consideration should be given to completing a tax return (if you do not already) and making a “white space disclosure” to HMRC, on a tax return, to state that you have sold your house with land in excess of 0.5 of a hectare but that you believe that the land is required for the reasonable enjoyment of the property and providing evidence. By making the disclosure, you may feel that you are drawing HMRC’s attention to it (although, of course, they are already aware of the sale from the stamp duty land tax (SDLT) return submitted by the buyer) but our advice would be to make the disclosure as this should limit the amount of time that HMRC can enquire into the sale. Where no disposal is reported on a tax return and no disclosure made, HMRC could have much more time to look into your tax affairs, under the discovery provisions.
To win an argument with HMRC regarding the “reasonable enjoyment” angle, it is imperative that you retain evidence of how the land was used. This is where photographic and diary evidence could be key. You could take photographic evidence of parties and gatherings (assuming COVID-19 restrictions allows those in the future!) and diarise when these events took place.
Other considerations include:
- Whether other properties in close proximity are of a similar size and are comparable.
- Whether potential purchasers of the property would consider buying the property with a smaller garden.
- Whether the buyer has declared the SDLT charge at a “mixed use” rate.
- Case law surrounding similar sales.
Tax advice required
It is imperative that tax advice is taken, even many years ahead of the sale, so that you can consider the necessary steps to take. Our tax team are well versed in this particular area of capital gains tax and would be delighted to help you. You can contact the tax team here.