Most people buy and sell the property they live in without any thoughts about tax (other than, perhaps, Stamp Duty Land Tax). However, there are some circumstances in which selling the property you live in can cause tax problems. Some of the main ones are:
- Where you own more than .5 of a hectare of land. If you have a large amount of land, Capital Gains Tax (CGT) may apply to land in excess of .5 of a hectare (about one acre). Large areas of land will be exempt if they are 'necessary to the enjoyment' of the property as a whole;
- Where the property has been let for a long period. The current law exempts private residences from CGT on a 'time' basis, so if the property has been let for ten years and lived in for ten years, the gain is apportioned. There are other circumstances in which periods of non-occupation can be exempt (for example, when working abroad). This is a complex area and the law has been tightened up considerably in recent years;
- Where the property is used wholly or in part for business purposes. In this case, the chargeable gain is normally calculated by reference to the proportion of the property used for business and the period of time over which it is used. Where the business use is furnished holiday lettings, CGT rollover relief may be available. In some circumstances taper relief on the business proportion of the gain may also be available;
- Where there are two or more disposals. If the house and land are being sold separately, CGT may bite (hard!) on the land sale; and
- Where the house has been used for ‘hobby farming’, the gain which is exempted by the application of Agricultural Property Relief may be restricted.
- Where more than one property is owned. A couple can have only one CGT-exempt 'Principal Private Residence' (PPR), so if you own two houses you should generally elect for the one with the higher potential gain to be chosen as the PPR. The election must be lodged within a strict time limit, so it makes sense to consider this when buying a second house. Recently HMRC have been attacking the validity of such elections where they believe that a second home sold at a substantial gain after a short period of ownership (typically after being inherited) has not been used as a residence by the owner as a matter of fact. HMRC have also brought several cases since 2016 attacking private residence exemption claims in cases where they consider that the property sold was not in fact the residence of the vendor - arguing that the 'quality of residence' did not justifty the claim. Some of these have led to CGT being payable when a person owned only one residence.
In most cases where a house and land attached are to be sold separately, it is normally advisable to sell any land before selling the house, but take advice in every case in order to avoid tax pitfalls.