Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from February 2007. Older articles are accessed through our Archives page.

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My partner and I own a house as tenants-in-common. Adjoining the house is a piece of land, approximately 6.5 acres, which is held in my sole name. We use the land as a paddock for grazing horses.

It occurs to me that when the land is eventually sold, the profit will attract Capital Gains Tax (CGT) and since paddock-sized pieces of land in this area have almost trebled in price since I bought it, the tax could be quite substantial. Conversely, when we sell the house, CGT will not be payable because it is our main residence.

I assume that if the house and land were held as one property, CGT would not be payable because the whole parcel would be a "main residence".

If this assumption is correct, is it legally possible for me to sell the land to us, bringing house and land together under one deed and would such a move enable us to avoid CGT when the house with paddock is sold at some time in the future? If not, can you suggest any other way of achieving a similar objective? I have in mind making the "me to us" sale at an agricultural land price which would produce very little in the way of immediate profit to me.

Maggie Fleming writes:

This is one of the most contentious areas in CGT. There are a number of hurdles for you to negotiate. The first requirement is that the land in question should be "garden or grounds". It is not garden but should qualify as grounds - I assume that you are not letting it out to someone else but are grazing your own horses there.

But the real stumbling block is the "permitted area". An area of up to half a hectare is permitted automatically, but any claim for a larger exempt area will be allowed only if it is, to quote the relevant section of the legislation, "required for the reasonable enjoyment of the dwelling house... having regard to the size and character of the dwelling house".

"Required" is a weasel word but it is clear that the test is what the house requires, not what you require. You are well over the half hectare limit and without knowing the type of house you have - a small property or a mansion house - it is impossible to say what size of grounds are required for its enjoyment. If you bought the house from someone who accepted a much smaller permitted area, you have a weak case, as the Revenue will argue that a larger area cannot be required. If you have made substantial changes to the property, however, including possibly adding stables, you may be able to argue that the paddock is required.

Maggie Fleming continues the series in which our Clinic experts provide a guide to those thorny issues that can leave the unwary out of pocket:

I have just moved in with my girlfriend but will hold on to my flat and rent it out. I am worried about being hit by Capital Gains Tax (CGT) when I come to sell as I think I will lose Private Residence Relief (PRR).

PRR is available when a person sells their only or main residence. That means if you have lived in that property for the whole period of your ownership, you will be completely exempt from CGT. Complications arise when, as in your case, someone has not lived in a property for the whole time they have owned it, or when they have more than one residence. For example, people sometimes move into a new house before the old one is sold. This often happens when the market is slow. They may decide to let out the old property while waiting for the market to improve.

So what's the bad news?

In most cases, there will be no CGT to pay if you sell in the first three years. That is because the final 36 months of ownership of a property attracting PRR are always exempt from CGT, even if you are renting it out. There are also specific exemptions for various periods of absence, especially where you are prevented from living in the property because of your work.

I like the sound of that. Any exemptions that might apply specifically to me?

Where you rent out a property that has at any time been your only or main residence, PRR is extended. Depending on the particular circumstances, an additional amount of up to £40,000 can be exempt. The limit applies per person, so it may be worth having both the property and the rental agreement in joint names of spouses or civil partners.

Hold on, I've only just moved in - and that felt like quite a step...

OK, but you should also be aware that where you live in two properties, you can nominate which of these is to be treated as your only or main residence for CGT purposes by writing to the Inspector of Taxes within two years of acquiring the second residence. The election, once made, can be varied and it is possible to minimise gains by planning this carefully, especially as variations can be backdated. Don't forget that a married couple or civil partners can have only one qualifying residence between them.