Tax law is complex and you should seek independent tax advice to determine and understand the tax consequences of any property you sell, and how it may affect your tax position more generally. The information below only highlights the key factors to consider, and cannot be regarded as comprehensive information or as constituting tax advice.
Tax position on sale of land
The tax treatment depends on the circumstances of each case, but the disposal will fall into one of the following categories:
- The disposal could be exempt from capital gains tax because it falls within the main residence exemption;
- The disposal could be subject to capital gains tax;
- The disposal could be subject to income tax.
Main residence exemption
An individual can claim full main residence exemption on disposal of a residence which has, throughout the period of ownership, been the individual’s only or main residence.
Main residence exemption is available where an individual sells garden or grounds used for the occupation or enjoyment of a residence, roof space, so long as, at the point of sale, the individual continues to own and occupy the residence. Relief will not be available if the residence has been sold before the sale of the garden or grounds, or if at the time of sale the residence has been demolished (and the disposal is simply of a building plot).
Where the total land area (including the land on which the residence sits) exceeds ½ hectare, it will be necessary to demonstrate that the land is required for the reasonable enjoyment of the residence (the “permitted area”). This will be determined by the size and nature of the residence, the location, the size of other gardens in the locality, how the land has been used. The question is objective, and cannot take into account the particular requirements of the individual. For example, if an individual owns a house with paddocks because he owns horses, this will not necessarily mean that the whole of the land is required for the reasonable enjoyment of the property if, for example, the residence is relatively modest. Main residence exemption will extend to any garden or grounds that fall within the permitted area.
The land may include buildings, in which case the nature of the use may have a bearing on main residence exemption. If the buildings have been used for the purposes of a trade, relief would not be available.
Relief may also be excluded if the buildings are not “within the curtilage” of the main residence. This can be difficult to establish, but will usually mean that if a person were to look at the buildings together they would appear to comprise a single dwelling.
Care should be exercised where the part of the garden being sold has been fenced off or otherwise not used as part of the garden or grounds. It is advisable to take photographs of the land to demonstrate that it has been used as part of the garden or grounds of the property.
Capital gains tax on the disposal
Capital gains tax (CGT) could apply on the whole or part of the gain on disposal of the land. This could apply, for example, where
- the land sold falls outside the permitted area;
- the residence was not the individual’s main residence throughout the period of ownership;
- the residence has been sold or demolished before the disposal of the land.
The property may not qualify as a main residence for the purposes of the exemption if the individual had another residence and had not made a valid notification in relation to the property where the land is being sold.
The exemption may not be available where the individual cannot demonstrate an intention for the property to be their main residence, the occupation of the property was merely temporary, or where the individual cannot demonstrate any permanence with regard to the occupation of the property.
HMRC are likely to challenge any claim to main residence exemption where the period of actual occupation of the property is short, although in some circumstances it is possible to claim the exemption for short periods of occupation.
If a property is not an individual’s residence throughout the period of ownership, it is possible to apportion this period in relation to periods of occupation as the main residence. If the property has been a main residence at any time in the period of ownership the last 18 months will be treated as a period of occupation. However, where the disposal is in respect of part of the garden only, it is usually necessary that the individual is in occupation of the property at the time of disposal of the garden.
The rate of CGT will be 18% or 28% depending on whether the individual is a basic or higher rate taxpayer.
Income tax on the disposal
Income tax rather than capital gains tax could be due on the disposal if it is treated as a disposal of land in the course of a trade of dealing in land by the individual. Care needs to be exercised where the individual has a history of property development or dealing or where the intention of the acquisition was to sell the land.
Income tax will also be charged if the vendor enters into a slice of action deal based on the eventual profit on the development.
There is specific anti-avoidance legislation designed to catch situations where a profit has been made on the disposal of land where the nature of the transaction does not fall clearly into either investment or trading. If these provisions apply, the profit is subject to income tax.
Income tax will be charged at the individual’s marginal rate of tax, which could be 20%, 40%, or 45% depending on the individual’s personal tax position.
A large number of cases have been heard before the courts and the tax tribunals, which demonstrate that HMRC actively review claims for main residence exemption. Although each of these cases is determined by their facts, a number of key considerations have emerged over the last few years. These include the following:
- HMRC will look closely at situations where the property has been owned for a short period of time;
- The individual’s intention when the property was bought is an important factor;
- There must be quality of occupation of the property, which will involve being able to demonstrate that the property was a real home. This depends on a number of factors based on the circumstances;
- There must be permanence to the occupation of the property. Occupation while another property is being repaired or renovated is unlikely to be regarded as entailing sufficient permanence;
- Significant alteration or redevelopment of the property will raise questions from HMRC;
- Complicated personal situations involving frequent moves will be looked at closely;
- A history of property development will raise questions.
Advice must always be sought as the law concerning the availability of main residence exemption can be complex.