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 ( 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):
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.