Most people don't need to concern themselves with paying capital gains tax (CGT) when they sell their home. This is because Principal Private Residence Relief (known as PPR), which applies to the disposal of a person's only or main residence, generally means that any gain in the value of their home is fully exempt from CGT. 

But you shouldn't assume that this 100% relief automatically applies. In fact, there are a number of conditions that must be satisfied for PPR to apply. For example, the relief doesn’t apply at all if you acquired the property for the purpose of realising a gain. In other cases PPR may only apply to part of the gain and CGT will be payable on the rest. This can happen where (among other things):

1. The property has not been your only or main residence for the entire time you owned it, perhaps because you let it out before moving in yourself.
2. You have only occupied part of the property as your residence, for instance where some rooms have been used exclusively for business purposes.
3. The property has disproportionately large gardens or grounds.

It is this last example that has recently been the subject of judicial attention in the case of Leslie and Catherine Phillips v HMRC (2020). Mr and Mrs Phillips bought their home in a rural area outside of Solihull for £450,000 in 1997. The house had four bedrooms, four bathrooms, three reception rooms, a garage for three cars, a swimming pool and substantial gardens. The entire grounds covered 0.94 of a hectare (or a little under two and a half acres). Mr and Mrs Phillips sold the property and grounds to a developer in 2014 for an undisclosed price substantially higher than the 1997 purchase price. 

Mr and Mrs Phillips assumed that the entire gain would qualify for PPR. HMRC disagreed. 

A property, its gardens and grounds will automatically qualify for PPR (assuming the usual conditions are met) if they do not exceed 0.5 of a hectare (just under one and a quarter acres) and this includes the footprint of the house. If the grounds exceed 0.5 of a hectare, PPR will only apply to the additional land if it is required for the reasonable enjoyment of the house as a residence, having regard to the size and character of the house. So a very large house may benefit from a generous garden and PPR will apply to the whole grounds if the gardens are proportionate to the house.

In this case, HMRC argued that the grounds were greater than required for the reasonable enjoyment of the house, so only part of the grounds qualified for PPR. HMRC demanded that Mr and Mrs Phillips pay CGT on the proportion of the overall gain attributable to the 'excess' land, amounting to some £160,000. Mr and Mrs Phillips appealed to the First-tier Tax Tribunal (FTT). 

When considering how much of the plot was required for the reasonable enjoyment of the property, the FTT took into account:

• comparable properties in the same area, and the size of their grounds, which were roughly in the same proportions to Mr and Mrs Phillips' house and grounds
• the size of and value of Mr and Mrs Phillips' house and grounds
• the rural nature of the property's location, and
• the fact that when Mr and Mrs Phillips bought the property it was originally marketed with a far smaller garden (about 0.3 of a hectare) but none of the potential purchasers would go ahead without being able to buy the entire 0.94 hectares.

The FTT agreed with Mr and Mrs Phillips that for this particular house, in its particular location, the large grounds were required for its reasonable enjoyment. As a result PPR applied to the entire gain and there was no CGT to pay. 

Whether CGT is payable will of course depend on whether the conditions for PPR are established, and in some cases this will mean all the relevant circumstances relating to your home will need to be looked at. If you live in a home with a large garden or extensive grounds, or where part of the property is used exclusively for business or it has not been your only residence throughout the period of ownership, it is very important that you take advice, not only when you come to sell the property, but on its acquisition. Since 6 April 2020 if your home doesn’t qualify in full for PPR it is necessary to complete a 'residential property return' and pay any tax within 30 days of completion, so you should take advice well in advance of any sale.