Taxman and the garden shed

Source: Tribunal | | 06/07/2017

One of the most valuable of the Capital Gains Tax (CGT) exemptions covers the sale of the family home. In general, there is no CGT payable on the sale of a property which has been used as the main family residence. This relief from CGT is commonly known as principal private residence relief (PPR).

If you simply sell the family home, the case for PPR is very straightforward, but it becomes much more complex when you sell off part of the land on which the home stands or maybe sell buildings, such as the 'garden shed'.

One of the conditions for PPR to apply to a partial sale is that the garden or grounds (including the buildings on them) are not greater than the 'permitted area'.  This is defined as less than 0.5 hectares (just over an acre) in total, although it is possible to argue that a bigger house requires more land than the statutory 'permitted area'. This was tested recently in a Tribunal case, where a couple had sold their home, other buildings and land in 2007.  HMRC had challenged whether PPR should apply to all of the property disposed of; there was no doubt about the main house, but two garden sheds were seen by HMRC as a different matter.

In this case the area of the gardens and grounds was greater than 0.5 hectares and therefore the taxpayers needed to justify why a greater area was needed for their quiet enjoyment and occupation of the main house. The case centred on two sheds on the land, which the taxpayers argued were part of the dwelling house but HMRC argued was not. HMRC sought to specifically exclude the larger shed from qualifying for PPR.

The full background to this case is a complex and long running saga; we won't bore you with the full details, but it also included a procedural issue as to whether HMRC’s assessments were issued out of time.

The Tribunal examined the underlying transactions in great detail and found in HMRC's favour stating that it was clear that the size of the garden and grounds were in excess of the permitted area of 0.5 hectares.  As a result the Tribunal determined that some CGT was due, although interestingly not the full amount originally assessed by HMRC.

The Tribunal also considered whether the couple and their advisers took reasonable care in claiming PPR. The couple was found to have done so, but their advisers were found to have acted carelessly!


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