Selling part of your garden for development could be a shrewd move
The demand for new homes is greater than ever and many homeowners with large gardens consider selling part of their garden to property developers or building a house themselves.
We are often asked about the tax implications of this…
When you sell your only or main home any profit on the sale is generally exempt from Capital Gains Tax as a result of Private Residence Relief (PRR). Your ‘home’ includes your garden and grounds so long as the land is used and enjoyed as part of your main residence whilst you live there.
It is possible to claim PRR if you sell just part of the property, for example part of the garden. The relief automatically applies to properties of up to 1.2 acres (0.5 hectares) in total. It is also possible to claim the relief if your plot is bigger than this, as long as the extra space is required for the reasonable enjoyment of the house. However, if you have a larger plot, HM Revenue & Customs may argue that the sale of part demonstrates the land sold was not required for the reasonable enjoyment of the property, and so seek to deny the relief.
To ensure any relief is available, the land should clearly be part of the gardens or grounds and used as such until the date of sale, so it should not be separated or fenced off from the area you are going to retain. We would also recommend you keep evidence of the area being sold was used as an integral part of your garden (for example taking photographs of the garden in use).
Obtaining planning permission to develop part of your garden will not automatically prevent PRR being available and this may make the land more valuable. But at the same time, please be aware that if you purchased the property with a view to realising a profit on the sale of some or all of it, PRR will not be available.
Likewise, if you decided to build the new house on your land and sell the completed property this could be viewed as trading activity, meaning at least part of the profit realised is subject to Income Tax and not Capital Gains Tax.
You should also be aware of the transaction in land anti-avoidance rules which could be triggered in certain circumstances which would result in any profit being subject to Income Tax.
On a positive note, if you are able to claim PRR on a sale of part of your garden, this could result in the gain realised being tax-free. Given the potential tax savings, if you are thinking of selling part of your garden we would recommend getting professional advice as early as possible to ensure any necessary tax planning steps can be taken.
From 6 April 2020, the sale of your garden, where PRR is not available in full, will mean a UK Land Return will need to be completed and submitted within 30 days of the transaction completing. Any tax will also be due at this time based on your expected annual income. Further details of the new UK Land Return can be found here.
For advice on the tax implications of selling some or all of your property, please do contact me here, or call +44 (0)330 124 1399.
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