In the UK, we take for granted
that if we sell our main home, we don’t have to pay Capital Gains Tax (CGT).
Yet, selling a home is still a disposal for CGT purposes. The main thing that prevents a CGT bill from
being triggered by a sale of the home is CGT principal residence relief (PRR).
As it can prove to be such a valuable relief, it’s worth any homeowner getting
to grips with PRR. Otherwise, if your
home comes with a bit of land for example, you could end up with an unwelcome
CGT bill if you decide to sell up. That
was the fate of Mr and Mrs Fountain, in the recent case of Fountain v HMRC ([2015]
UKFTT 0419 (TC)).
It’s easy to be lulled into a
false sense of security when it comes to selling gardens because the CGT PRR legislation
makes specific provision for them.
Section 222(1) TCGA 1992 says that, if there is a disposal of an
interest in a dwelling house which has been an only or main residence at some
point during the period of ownership, the land which is held by the owner ‘for
his own occupation and enjoyment with that residence as its garden or grounds
up to the permitted area’ can be exempt from CGT too, if its disposal would
give rise to CGT also.
The ‘permitted area’ means an
area, inclusive of the house, which is 0.5 hectares (5,000 square metres or, in
old money, about 1.25 acres). An area
larger than that may be allowed as long as it is required for the reasonable
enjoyment of the house in question – cue a whole lot of case law on that point
alone.
However, even if the garden is
within the permitted area, it is not a given that PRR will be available on its
disposal, as the Fountain case demonstrates.
Mr and Mrs Fountain owned a home with land. Part of the land was divided into five plots
while Mr and Mrs Fountain were still living in the home (shown as the Old Home
on the diagram below):
|
Drive
|
Plot 5
|
Drive
|
| |
 New Home Plot 4 |
 Old
Home | |||
|
Plot 3
| ||||
|
Plot
2
|
Plot
1
|
| ||
The case records that Plots 1 and
2 were formed from land used as the Old Home’s gardens but were separated from
the house itself by a driveway. Having a
garden physically separated from a house does not necessarily deny PRR, though.
Various parcels of land were then
disposed of. Plots 1 and 5 were sold in
March 2006. Plot 3 was given to the
Fountains’ son in June 2006 and he built a house on it. The case report does not record whether PRR
applied to these disposals. Mr and Mrs
Fountain then built a new home on Plot 4 and moved into it in January
2007. In February 2007, the Old Home was
sold. Plot 2 was sold some two years
later. The Fountains claimed PRR on the
basis that Plot 2 was part of the garden of their New Home.
HMRC refused to allow PRR on the
sale of Plot 2, even though Plots 2 and 4 were on the same title at the Land
Registry. The problem was not that the
two plots were separated. Rather, at the
time of its sale in 2009, HMRC contended, Plot 2 was not part of the garden of
the New Home and that was what mattered.
Following the ratio in the 1976 case of Varty v Lynes, it was
irrelevant that Plot 2 may have comprised the garden of a former home. The judge agreed.
Although non-contiguous gardens
are not a barrier to finding that PRR is available, it was noted by the judge
as ‘unusual’ and in this case it does seem to have counted against the
taxpayers. However, the other factor
that sealed the taxpayers’ fate was that, at the time of its sale, Plot 2 was
still being used to store building materials from the construction of the New Home
on Plot 4. In addition, by being covered
in hardcore, Plot 2 was not being cultivated as a garden and therefore, because
of this usage, Plot 2 could not be regarded as forming part of the garden of
the New Home on Plot 4 at the time Plot 2 was sold.
Taking their eye off the PRR ball
cost these taxpayers just over £11,000 of CGT.
