CGT – The Tax Facts

Everyone knows that nothing is certain except death and taxes. However if you are selling your property, especially if it is a large estate, the taxes can be as unpredictable as the weather.

Property owners considering selling up should be wary of the Government’s Capital Gains Tax. It is often overlooked, but if you sell part of your estate at a profit, a hefty and perhaps unexpected bill could eat into the proceeds of the sale.

Capital Gains Tax is designed so that should an asset rise in value, a portion of the profits gained goes to the Inland Revenue.

The amount charged depends on what tax bracket the seller is in, and how long the property has been occupied. The longer you have owned the property, the less tax you will pay, but if you are in the highest tax bracket you could still pay a tax bill of up to 40% of the increase in value of the property being sold.

Homeowners are usually eligible for a ‘primary residence’ allowance, which means that if they should sell their home, they would not be taxed on any increases in value.

There are cases where this allowance does not qualify, however, and owners of larger properties or estates should be vigilant.

Properties of less than half a hectare automatically qualify for the allowance.

For sales of estates larger than this, each case is decided individually, but a sizeable property could still qualify for the allowance under certain circumstances.

According to Inland Revenue guidelines, properties with more than half a hectare of land may be eligible for the allowance if the land is for ‘the reasonable enjoyment’ of the property.

‘Reasonable enjoyment’ depends on the size and character of the house: ‘If the property in question is a large country house on five acres of land, the land could be deemed necessary for the “reasonable enjoyment” of the house and in keeping with its character. However, if the property is a two bedroom house on 30 acres of land, it will probably not qualify,’ said Michael Warburton from accountants Grant Thornton.

For Carolyn Steepler from HSBC Private Bank, you should be most cautious if you buy nearby land: ‘Issues start to arise when you start adding to your land, particularly if the land is separated by a wall, or a fence, or especially a road,’ she said.

Ms Steepler believes that if the property is purchased as a whole, you are less likely to be liable for the tax at selling time, but even if land was purchased separately, it can still be shown that it is a part of the property: ‘It is a question of fact. As long as you can show that it is being used and lived in – even by putting a barbecue on the land – you will improve your chances [of avoiding the tax],’ said Ms Steepler.

In one case the owner of a house and a separate piece of land successfully demonstrated the extra plot’s use with the home simply because it had a washing line on it.

In fact, it could be deemed that other buildings within your estate could be part of the principal residence, and therefore could also be eligible for the allowance: ‘If a cottage on the estate is occupied by a family member, caretaker or housekeeper, providing services for the benefit of the main house, then the cottage may well qualify for the allowance,’ said Mr Warburton. But again, there should be no fences or walls separating the two buildings, and they should be reasonably close together.

The land in question could also used in other ways to qualify for the allowance. For example, if you keep horses, there will be little doubt that a paddock is necessary for the enjoyment of the property: ‘Even if it’s an orchard and you can show that the fruit is grown and eaten by the family, it should qualify for the allowance,’ said Ms Steepler.

But if you only sell part of your estate, it becomes harder to show that the land in question is necessary for the enjoyment of the property: ‘It raises the question: how can you show that the land is necessary for the house if you are selling it?’ said Mr Warburton. ‘It can be shown that in the past it was necessary for the enjoyment of the house, but it isn’t any longer, for example if you have children who have moved from home, or if you are in financial difficulty,’ he added.

It becomes less of a grey area if you keep part of the estate but sell the main house: ‘Sale of the land after the sale of the house will not qualify [for the allowance] as the land must be enjoyed with the house at the time of the sale – so watch if you keep back some land to sell separately at a profit,’ said Ms Steepler. Selling your estate in separate lots at the same time is also likely to incur the tax.

Passing on property to your children could also present difficulties, as this could be deemed as a ‘disposal’ of the property: ‘If you pass land to your children you are deemed to have disposed of it, and therefore you are liable for the tax. Then the question arises: how can you pay the tax if the property actually hasn’t been sold?’ said Callum Innes from estate agents CKD Galbraith.

The primary residence exemption is a very valuable one, and as a result, the Government is keen to ensure it is not abused. Therefore, if you are selling any property for profit, you are likely not to qualify for the allowance. However, each case is treated individually, and the best recommendation for a complex sale is to seek the advice of tax experts who may be able help reduce the bill. In life most taxes are certain, but Capital Gains Tax can be avoided.