When you tell us you have sold your home and garden do we assume that the gain will be completely covered by the main residence exemption for CGT, or do we question you further? Experience shows that establishing the facts can avoid a difficult tax investigation in the future.
Billy and Hazel Ritchie sold their home which included grounds of about 0.7 hectares for £2 million in 2007. Their first mistake was to pay the proceeds into their business bank account. Their second mistake was not to declare the gain on their SA tax returns.
They did tell their accountant about the disposal, who as he was not a CGT expert, sent Billy to see a tax adviser (Russell). However, Russell failed to ask these key questions:
- When was the house and land acquired?
- For what period did they occupy the property as their main residence?
- Was all the land required for the reasonable enjoyment of the home?
Russell told Billy that on the basis of what he had told him (but he didn’t ask the key questions) CGT main residence relief should potentially be available for the full gain. Billy reported back to his accountant that the gain was exempt. However, the accountant and tax adviser did not talk directly to each other to clarify any possible misunderstandings. This lack of communication to confirm the tax adviser’s opinion was the third mistake in this case.
In fact the Ritchies had acquired the land in 1987 and built their house on it. They moved into that house in 1995, so they could not have occupied the property as their main residence for their entire ownership period; some part of the period would fall outside of the main residence exemption.
Land of up to 0.5 hectares is the “permitted area” which is automatically covered by the main residence exemption, when the land is used in association with a home for which that exemption applies. In this case the grounds of 0.7 hectares were larger than those of similar neighbouring properties, but Billy Ritchie used a shed which was 85 meters from the house for his hobbies. The tax tribunal ruled that this shed was used as part of the dwelling, which effectively extended the permitted area. However, it would have saved a lot of hassle if this fact had been established at the time of the disposal and declared on the tax returns.