The exemption covers the residence itself, together with the “garden or grounds” that go with it, up to the “permitted area”.
The “permitted area” is half a hectare – about 1.2 acres – or any larger area which is “required for the reasonable enjoyment” of the house “having regard to the size and character of the dwelling-house”.
As you would expect, HMRC take a lot of convincing that any “dwelling-house” needs more than half a hectare for the “reasonable enjoyment” of the property, and in any case where you declare (as you are required to do) that you have sold a main residence with a larger area of grounds, you are likely to have to persuade a sceptical tax inspector, and his crony the District Valuer, that the exemption applies.
In my experience, HMRC will do their best to define the “permitted area” (even if they accept it should be larger than half a hectare) in such a way that the land outside the “permitted area” is the most valuable – perhaps because it includes outbuildings with development potential.
If you find yourself involved in a dispute with HMRC about the extent of the main residence exemption, the first essential is to get professional advice. You are up against an expert (in the shape of the District Valuer), and one who will be believed over you if it comes to it, because he will have at his fingertips the records of recent sales of other properties in the area. Only a similar professional, such as a qualified valuer, will have access to similar statistics. Almost by definition, if you are having this argument, there will be a big capital gain at stake, so money for good professional advice is well spent.
So, what are the themes on which the argument will centre?
One strong point in your favour will be if you can show that the market value of the property would be reduced significantly, or better still, the property would become unmarketable, if all the land was not sold with the property. After all, if you would have difficulty in selling the property unless the appropriate amount of land went with it, that is a strong argument for saying that the prospective purchaser thinks that the land is “required for the reasonable enjoyment” of the property.
If you think about the typical detached house, it will have a front and back garden, with walls or fences around them, and they are the “curtilage” (originally French for Courtyard) of the house.
Go up a rung on the property ladder, and think about your typical Manor House. This will probably have a proper courtyard at the rear, with stables and other outbuildings, and it would be difficult for HMRC to argue that these did not form part of the “curtilage” of the property, because that is where the name comes from!
The problem arises when the “curtilage” is not well defined by walls, but is a more diffuse area, perhaps with a swimming pool or a games room or granny cottage within it. This is where a good surveyor can come to your aid, to demonstrate that this area is all part of the “curtilage” of a property of this size.
This is where the District Valuer holds all the cards, unless you have a really good professional on your side. The DV will assert that numerous other houses in the area have been sold with less land, and that they were just as large as your house. Confidentiality will prevent him from going into details, of course, but a good surveyor will have other comparatives, in your favour, at his fingertips.
These tend to cause particular problems, because by their nature they will be fenced off from the main house. If you have stables (in use as such) within your curtilage, you can argue that the paddock is needed for the property to feed the horses, but if you have converted your stables to some other use, HMRC will jump in and say that the paddock is no longer “required”.
Sale of part of the land
If you sell part of the land while remaining in residence, then you are likely to have real trouble arguing that it was “required”. If the sold land and the retained land are all within half a hectare, you are safe, because the half hectare is yours by statute, but if the sold land was outside this magic area, you can expect HMRC to say that it was self-evidently not “required” because you have sold it!