Main residence relief – extensive grounds
In the recent case of HMRC v Ritchie the following issues were considered in relation to the main residence relief for capital gains tax purposes:
- Whether an entire estate qualified or only part of the grounds;
- How to define the ‘permitted area’; and
- Whether the discovery assessment raised by HMRC was valid.
Background – Main Residence Relief Rules
Main residence relief is available where a gain arises from the disposal of an interest in a dwelling house, or part of a dwelling house which has at some time been its owners only or main residence. In addition to the relief available on the disposal of a dwelling house, relief may also be due on the disposal of land held with that dwelling house. This would potentially include the garden or grounds of that residence so long as:
- That land is occupied and enjoyed as the garden or grounds of the residence; and
- The total area of land including the garden and grounds being disposed of (and the dwelling house itself) does not exceed the permitted area (0.5 hectares).
Land which at the date of disposal is in use for some other purpose for example agricultural land, commercial woodlands, land under development or land in use for a trade or business would not ordinarily be regarded as part of the garden or grounds.
Land which is disposed of separately before the disposal of the dwelling house may qualify for relief if the other conditions are fulfilled. However, land which is disposed of separately after the disposal of the residence cannot normally qualify for relief.
Usually the garden and grounds will be the land which surrounds the residence and is enclosed with it. Land which is separated from the residence by other land which is not in the same ownership will not normally be part of the garden and grounds of the residence.
If all or part of the land being disposed of is land which is in the part of the property which is in excess of the permitted area (with the area including and closest to the dwelling house being counted as absorbing the permitted area first) then it can potentially qualify for relief, but only if “the area is required for the reasonable enjoyment of the dwelling house as a residence, having regard to the size and character of the dwelling house”.
Where the garden and grounds of a dwelling house are in excess of the permitted area and there is a separate disposal of part of those garden and grounds, this may be prima facie evidence that the part disposed of was not required for the reasonable enjoyment of the dwelling house as a residence. HMRC accept that where that disposal is within a family or due to financial hardship that this prima facie rule of thumb can be overridden.
Background – Facts of the Case
Mr and Mrs Ritchie disposed of their estate and claimed main residence relief on the whole area. HMRC argued that the grounds exceeded 0.5 hectares and the land exceeded that required for the full enjoyment of the property. The taxpayers appealed.
The First-tier Tribunal observed that the test for the area of land that is required for the reasonable enjoyment of the dwelling house as a residence is objective. It added that ‘required’ is to be equated with necessary, not just desirable.
The first question was, therefore: what amount of garden and grounds is necessary for the enjoyment of the dwelling house? Having found that the shed was part of the dwelling house, the tribunal concluded that the approach path to the shed was part of the permitted area but not land lying on the other side.
In deciding how to apportion the gain between the permitted and unpermitted areas, they found that all of the land was of equal value to a developer in this particular case.
The procedural issue was whether the discovery assessment raised by HMRC was valid. The tribunal accepted that the HMRC officer had been entitled to raise the assessment when she discovered that the family had not self-assessed themselves to CGT.
However, on appeal, HMRC had to show that the legislative conditions were met and, in order to raise assessments after four years but before the end of six years, carelessness by each of them had to be established.
The tribunal found that the family’s advisers had been careless in advising them that ‘no mention of the transaction needed to be made’. Since the advisers had been acting on the taxpayers’ behalf, this meant that the assessments had been issued on time.
This is intended as a summary and overview of the tax situation and does not constitute financial advice and no action should be taken without first seeking professional advice specific to your circumstances.