HM Revenue and Customs (HMRC) are big battalions by anyone's standards, but their word is not law and, with expert legal assistance, they can sometimes be proved wrong. In one case, a couple succeeded in overturning six-figure Capital Gains Tax (CGT) demands raised against them following the sale of their home to a developer.
The couple reluctantly sold their substantial home when faced with the prospect of new houses being built all around them. On the basis that the property was their principal private residence (PPR) and thus exempt from CGT, they did not report the gain arising from the sale on their tax returns. About three years later, however, HMRC raised CGT demands of £162,820 against each of them.
HMRC asserted that the property's garden – which extended to 0.94 hectares – was larger than it needed to be and that CGT relief was only available in respect of 0.5 hectares. However, in challenging the demands before the First-tier Tribunal (FTT), the couple contended that the whole of the garden was required to enable reasonable enjoyment of the property.
Ruling on the matter, the FTT noted that, in determining whether the garden was larger than required, context was everything. At one extreme it might be said that nobody needs a garden at all. At the same time, what might be viewed as a large garden in a city centre would be considered far too small for a stately home.
Upholding the couple's appeal, the FTT observed that the property was located in a rural setting and comprised a large main house, a one-bedroom cottage, a three-car garage and a swimming pool. The garden was proportionate to the property's scale and character and its size was comparable to the grounds of other substantial country homes. The couple were thus entitled to full PPR relief in respect of the property's sale and the CGT demands were reduced to nil.