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Buying and selling your home: Capital Gains Tax and Stamp Duty Land Tax

View profile for Ben Taylor
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When it comes to buying or selling your home, there are two important taxes to bear in mind: Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

Recent case law has highlighted arguably a growing difference in the approach to these taxes at HMRC in respect of what constitutes “garden and grounds”.

Capital Gains Tax

When an individual sells their home, principal private residence relief (PPRR) typically acts to provide relief from CGT on the disposal.  Briefly, CGT is a charge on chargeable gains made on disposal of capital assets, and this includes your home.

Broadly, PPRR is available where a dwelling has been an individual’s only or main residence at some time during its ownership and where it was not acquired for the purpose of realising a gain.  The legislation provides that relief is given in respect of the dwelling and any land occupied and enjoyed with that residence as its garden or grounds up to the “permitted area”.  The “permitted area” is half a hectare, including the area covered by the house.   It should be noted that a larger area of garden and grounds is allowed under the legislation where it is required for the “reasonable enjoyment of the dwelling as a residence, having regard to the size and character of the property”. 

In terms of what is required for the “reasonable enjoyment of the dwelling”, HMRC takes a narrow approach; and it should be noted that case law provides that the requirements of the owner aren’t relevant, nor is it a question of what is desirable or convenient. There seems to be an element of objectivity required, and whether “without it there will be such a substantial deprivation of amenities or convenience that a real injury would be done to the property owner.” (Du Parcq J in Re Newhill Compulsory Purchase Order).

Naturally, and as you would expect, HMRC takes the narrow view so as to limit the availability of relief, which increases the chances that a disposal of one’s home will be, at least in part, taxable.

Stamp Duty Land Tax

SDLT is payable on land transactions in England and Northern Ireland.  So, on the sale of a person’s house, whilst the seller may have to consider CGT, the buyer will have to consider SDLT.

In respect of the purchase of a dwelling, typically you would expect the residential rates of SDLT to apply.  However, in order for the residential rates of SDLT to apply, the transaction needs to be “wholly residential”.  This means that if a part of it is not residential and it is, in fact, a mixed use property, the non-residential rates should apply.  This can be of benefit, as it can mean a lower tax bill. 

The question of what is included in the definition of “residential property” was the issue in the case of Hyman v HMRC [2019] a case in the first tier tribunal.  Here, the tax payers bought a property comprising a farmhouse, a barn, a public bridleway and 3.5 acres of land.

The legislation defines “residential property” for the purpose of SDLT as land or buildings:

  • used as a dwelling;
  • suitable for use as a dwelling;
  • in the process of being constructed or adapted for such use; and
  • land that is, or forms part of, the garden or grounds of the building in the above or an interest or right over land that subsists for the benefit of such building.

Non-residential property is essentially anything that is not residential property.

Again, we are faced with the question of what “grounds” means.  In Hyman, the taxpayers lost their appeal as, in the opinion of tribunal Judge McKeever, “grounds” should have a wide meaning.  According to the Judge, identifiable characteristics included:

  • land attached to or surrounding a house that is occupied with the house and is available to the owners of the house for them to use;
  • it is does not necessarily have to be used for ornamental or recreational purposes and can be allowed to grow wild;
  • it is not necessarily relevant that grounds and gardens are separated by hedges or fences; and
  • it doesn’t necessarily matter that other people have rights over the land (such as the public bridleway in this case).

The tribunal highlighted, however, that the land would not constitute “grounds” to the extent that it was used for a separate purpose, e.g. commercial.

It seems then that a key factor is the use to which the land is put.  It is notable that in June 2019 HMRC introduced a new page to their SDLT manual concerning this issue, which looks at the historic and future use of garden and grounds to help determine whether a transaction is residential or not.

Key take away

The important point to take away from this is that there is arguably a growing difference between the treatment of “grounds” attached to a residential property for the purposes of CGT on disposal and SDLT on purchase.  If you are purchasing or selling a property which has with it additional land used either as a garden or on a commercial basis (such as farmland), it is important to take advice at an early stage on the tax treatment of that disposal or acquisition, as this additional land can affect the tax position.