Meg Saksida outlines how to ensure that a valuable capital gains tax relief is maintained.
Main residence relief (MRR) allows up to a 100% deduction from any chargeable gain for capital gains tax purposes arising on the sale of one’s permanent residence. It is, therefore, a hugely valuable relief, but one that could be threatened by many seemingly innocent practices.
This article looks at some issues to consider when seeking to secure MRR on your property.
What is a main residence?
The legislation is quite vague on this point. A main residence is simply defined as a dwelling house which has been the taxpayer’s main residence at some time in their ownership. It also makes it clear that the dwelling’s garden or grounds are included, but it does not specify if the residence includes any additional buildings or if gardens or grounds not immediately beside the home would be included in the relief.
To answer these questions, we must turn to case law.
(a) The dwelling house
Case law has shown that the residence can be either the whole or a part of a single building or several buildings. A dwelling can be within business premises or a hotel or guest house and can be lived in jointly with a tenant.
A dwelling does not need to be a house or a flat. It can be an alternative structure such as a caravan, a houseboat or a residence within a factory. As long as it is not mobile, and electricity and water are connected, it will be considered a dwelling for MRR purposes.
In Makins v Elson [1977] ST 46, although the residence was a caravan sitting on a bare plot of land, as the caravan was being used as the taxpayer’s main residence, the land was eligible for MRR on the sale due to being the garden or grounds of a dwelling.
(b) Garden and grounds
Again, the legislation is vague on the definition of garden and grounds beyond stating that the permitted area is half a hectare; a larger plot will only be eligible for MRR if the taxpayer can prove the excess is required for the enjoyment of the dwelling. In justifying the need for the excess land, the size and character of the house will be considered. When justifying the requirements for the excess land, the test of need will be for any occupant living in that house, not a specific user. In Longson v Baker [2000] STC 244, it was held that the 7.56 hectares of land required by that specific taxpayer for their stables, riding school and fields would not be required by everyone using the home.
HMRC considers that ‘garden and grounds’ should be given their ordinary meaning being respectively an enclosed piece of ground for growing things and enclosed land surrounding the dwelling for ornament or recreation. It must be used for domestic purposes, so commercial woodland, business or trade use of land surrounding the property will never get MRR. Given that the garden and grounds need to surround or at least be close to the dwelling, any land separated from the dwelling, such as a separate allotment, would not be included in the MRR. Having said that, history is important. For example, if a front garden was separated by a road laid 20 years ago, meaning some of the garden is across the road, this could be considered as a part of the garden of the house.
Care must be taken when selling off a part of a larger garden to a developer, as the land must be attached to the home at the time of the sale. 30% of the garden sold at a time when the home is still a main residence may (depending on if it is inside the half hectare threshold) be classified as garden and grounds and qualify for MRR. However, if the house is sold with 70% of the garden and then the 30% land remaining is sold, the land would then be sold on its own with no dwelling attached, so would not be garden and grounds and, as such, would be chargeable.
If the land being disposed of exceeds the permitted area, disposing of it would tend to give prima facie evidence that it is not required for the enjoyment of the main dwelling and, as such, may be chargeable even if sold as part of a dwelling. However, if the disposal was due to financial hardship or made to family members, this may work to reinstate the relief.
(c) Additional buildings
To allow additional buildings for MRR purposes, they need to be both used by the occupants of the main home to increase their enjoyment of the home and ‘appurtenant to’ and ‘in the curtilage’ of the main residence. ‘Appurtenant to’ means a part of, being used by, or considered as an element of the main home. ‘In the curtilage’ means physically positioned in a small area, including the dwelling (e.g., in the same courtyard or in the vicinity). In Markey v Sanders [1987] STC 256, it was stated:
“It must be possible to look at the group of buildings as a whole and regard them as a single building”.
Any physical barrier will be contrary to this, such as the row of trees (in that case) or the path, lawn and garden that separated the gardener’s cottage from Lady Rook’s main residence in Lewis V Lady Rook [1992] STC 171.
(d) What is a ‘main’ residence?
The MRR legislation simply states that if the home “…has at any time in his period of ownership been his only or main residence…”, it will qualify for MRR, but what it means to ‘reside’ in a property is only defined in case law.
(e) Quantity
How long one lives in the residence can be a factor in determining residence, but is not the main factor. In Morgan v HMRC [2013] UKFTT 181, the taxpayer only lived in the home for two weeks before he investigated renting it but he secured MRR.
Others, such as Bradley v HMRC [2013] UKFTT 233 and Llewellyn v HMRC [2013] UKFTT 323, were in the property for months but were not eligible to MRR.
(f) Quality
The quality of occupation is how fully one lives in the home. Do they cook, sleep, rest, launder clothes there and have they moved in their furniture and changed their address?
In Bradley, the taxpayer completely renovated the house to her taste, but as it had always been on the market since she moved in, there was implicitly no intention to stay long. In Llewellyn, he moved in only with a sleeping bag, so there was not the required quality to make it a residence.
(g) Intention
Intention always trumps quantity and quality. In Morgan, the taxpayer moved in with the full intention of living there indefinitely. Irrespective of the change in his situation only two weeks after he moved in, because his intention was to stay at the property, MRR was secured.
Likewise, the dwelling being on the market for sale or rent on moving in will always quash MRR as there cannot have been an intention to remain or settle in the property.
Practical tip
MRR is restricted not only by the physical dimensions of the home, garden and grounds, and other structures within the residence, but on how long and how ‘fully’ the taxpayer lived in the home and whether the intention was there to remain settled in it. If there could be any doubt, clients should be encouraged to record their plans to remain settled in the property at the time of moving in, so they have proof of their intention in future years, should they need it.
