Tax Doctor: Selling a home with large grounds has tax pitfalls

Thursday, 28th February 2013

The Case

My husband and I are looking to downsize our home. Our children have now moved out and we are looking for a home which will be more manageable as we get older.

I was under the impression that profits from the sale of one's main home are exempt from tax, but I have now heard that HMRC are clamping down on homeowners' profits from the sale of their property in the form of a new 'Garden Tax'.

I am concerned as our house and grounds are fairly substantial. We have lived here for a considerable time as we bought the house in 1994. I worry that with the increase in value the home has acquired over that period we could face a large tax bill.

Is there anything we can do to minimize our tax liability?

The Prescription

Fortunately, there is no new 'Garden Tax' on homeowners' profits from the sale of their property. There has, however, long been a rule restricting the size of a property for which a homeowner can claim private residence relief.

At present you would normally have to pay Capital Gains Tax ("CGT") on any gain you make if you sell your home. You will, however, be entitled to full relief from CGT under the private residence relief if:

•    the house has been your only or main residence throughout your period of ownership;
•    you have not been absent for more than an allowed period of absence;
•    the garden or grounds are not greater than the permitted area; and
•    no part of your home has been used exclusively for business purposes.

The third requirement of the private residence relief has been in the spotlight recently due to political pressures in the coalition government to enhance tax revenues from high-value property.

It has always been the case that if the house you own was worth £3m and has nine acres of land, HMRC may only allow three acres to be sold free from CGT. If the other 6 acres were worth £300,000 of the total price, compared with a value 19 years ago of £100,000, a seller may have to pay up to 28% on the £200,000 gain. Depending on personal allowances and your income tax rate that could be as much as £56,000.

What is your garden?

When selling you are entitled to relief on 'garden or grounds' up to the 'permitted area'. The garden or grounds will include any enclosed land surrounding or attached to your dwelling house and serving chiefly for ornament or recreation.

Land let or used for a business (surrounding farm land for example) and land which has been fenced or divided off from your garden for development will not be entitled to relief.

Permitted area

If your garden and grounds do not exceed half a hectare (1.23 acres) you are entitled to relief for all of it.

If your garden and grounds exceed half a hectare (1.23 acres), you may not be entitled to relief for all of it. The 'permitted area' entitled to the relief is considered as the area required for the reasonable enjoyment of the dwelling house as a home. The size and character of your home will need to be taken into account.

If your garden does exceed half a hectare you will need to enter details of the disposal and gain on your self-assessment and explain why you think all or part of it is exempt from CGT. HMRC may ask for more details in these cases and a District Valuer will be asked to determine the size and location of the permitted area.