Tax implications of selling your garden

You may be thinking of selling off some surplus land to a developer. If this is part of your garden you might be thinking it's tax free because it's attached to your home. However before you agree any sale, it's important to understand the tax implications of selling your garden. 

Tax implications of selling your garden for development

Tax implications of selling your garden - overview

Whilst any profit from the sale of your garden may be subject to capital gains tax you may be able to claim private residence relief ('PRR').  If a successful claim is made you will not pay capital gains tax on any profit realised on sale. However, you should be mindful of those pitfalls to avoid (and which are detailed below) to ensure a claim is successful.

The permitted area

If the sale of your garden is within the 'permitted area' of your main residence it can potentially qualify for PRR. This would mean that any profit on selling the land would potentially be tax free.

The 'permitted area' is basically a garden or grounds of up to 0.5 hectare (including the footprint of the house). HM Revenue might accept that a larger area qualifies for relief if the garden and grounds are required for the 'reasonable enjoyment'. Particularly if this is in keeping with the size and character of the property.

This is a contentious point and frequently open to challenge by HM Revenue. Though their internal guidance indicates when they might accept that a larger area qualifies for relief.

To obtain PRR on an area larger than 0.5 hectares you will need to show that the land was required for the use and enjoyment of the house. This will be a question of fact and will depend on historical evidence of usage.

Business use

You will not be able to claim PRR on any part of your garden or grounds that has been used exclusively for business purposes. 

Exclusive business use might occur if you created a lease or licence so that part of your garden was used by a business. For example if it's used for events such as parties, weddings or attached to furnished holiday lettings in your grounds.

To avoid this trap you should ensure that any lease or licence created is for non-exclusive business use.

Intentions on acquisition

The tax implications of selling your garden may impact if you acquired additional land adjoining your home and subsequently sell it at a later date.

If planning permission was acquired prior to, or soon after your property purchase then HM Revenue might consider that it was acquired purely for re-sale. Alternatively, if the land was never part of your garden or permitted area and planning was obtained prior to marketing,this might also indicate you were planning to sell on at a profit.

Development work commenced, land fenced off, or garden sold separately after house sale

Your garden and grounds will only qualify for PRR if occupied with your residence. Once your land becomes separated from the residence it is no longer occupied 'with' and therefore PRR will be denied.

What happens if PRR is not available? 

So what are the tax implications of selling your garden if it is not covered by PRR?  

Basically any gain/profit will be taxed in one of the following ways:

  • Chargeable as a capital gain subject to capital gains tax
  • Taxed as trading profits under the profits in dealing and developing land provisions. These are worthy of a separate article in itself and we'll aim to cover this at a later date.

How are overages on the sale of your garden taxed?

If you sold your surplus garden/land to a developer you might have negotiated an overage. This would mean that you receive a share of the profits from the development. You might also receive an extra sum of money once planning has been granted or on completion. You therefore need to consider the tax implications of selling your garden in these circumstances too.

In this case, any monies you receive are likely to be taxed as trading income under the profits in dealing and developing land rules mentioned above.

What about self-developing?

The tax implications of selling your garden also extend to self-developing and will depend on whether you are: 

  • Intending to develop your garden and then sell whatever you build at a profit
  • Looking to build a new property in your garden as an investment asset for you or your family or to be your new residence 

If the former applies you will be treated as start a trade as a property developer. You'll need to consider the value of the land once development starts. Any increase in value from the original acquisition date up to this point may be subject to capital gains tax. 

Any profit realised once the development has completed will be subject to income tax.

If you're intending to build a new property either to live in or as an investment, it is unlikely that the dealing and developing land provisions will apply.

If you do build a new house in your garden the 'base cost' will be a proportion of the original cost of your home and garden. It would be sensible to get a valuation at this point, in case you eventually sell the property.

If you've held the property for a number of years you could 'trigger' a capital gain (that would be covered by PRR). For example by transferring the land to a limited company. This would increase the 'base cost' for capital gains tax purposes. However be aware there may be a potential Stamp Duty charge on transfer to the limited company.

Finally, if the new property is likely to be your home make sure you take advantage of the HM Revenue concession here to preserve PRR

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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