Capital Gains Tax main residence relief –problems with infill development

17 September 2015

When looking at public knowledge of the tax system, one of the most commonly understood rules is that Capital Gains Tax (CGT) is not charged on any gain arising from the sale of your main residence. Whilst this may generally be the case, it must be understood that the relief from CGT is quite strictly and narrowly drawn. If you fall outside of the parameters of the relief you will find that you have a gain that is fully taxable.

There have been a number of cases concerning the question of what is your main residence. It is well established from these cases that you must be able to evidence quality of occupation: the spirit of the relief is that it is there to exempt gains on the sale of what  would be characterised as a home. Incidental occasional or temporary occupation will not suffice, particularly where it appears that such occupation as has taken place is purely for the purposes of gaining the relief. It is clear from cases that have come before the tribunal that the existence of evidence is vital and in a digital age, where photos and scanned documents should be readily producible, the absence of evidence will place you on a back foot. 

If it is assumed that you can demonstrate that a property is your only or main residence, you are not out of the woods, particularly where you are looking at the sale or development of part of your home and/or gardens for development. Main residence relief is available in respect of a gain on the sale of your main residence, including its qualifying garden or grounds. The qualifying garden or grounds is normally limited to ½ hectare but a larger area will be allowed where it is required for the reasonable enjoyment of the property. 

Claiming relief in respect of the sale of part of your garden, is not at all straightforward as illustrated by a recently reported tribunal case, Fountain v HMRC. In this case, Mr & Mrs Fountain had lived in a property for many years. The property had land attached some of which was the garden to the house, some of which was for commercial use. Five building plots were established. In January 2007 they moved into a new house built on one of the plots and in February 2007, they sold their original house and some of the remaining land. In December 2009 they sold one of the plots and the question arose as to whether main residence relief was due. They failed in their claim. 

The reason for this is that the plot in question never became part of the garden and grounds of the house that became their main residence in 2007 – the fact that it appeared highly likely that the plot that had been sold had been part of the gardens of the house owned until 2007 was neither here nor there: what had been sold was a building plot which did not adjoin the house owned when the plot was sold. 

The case shows that whenever one is looking at the sale of land associated with a main residence for development, extreme care is required so as to ensure that relief is not lost unnecessarily. 

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