Turning your garden into a profit-generating asset, either by selling it or through development, can seem appealing.
However, it’s crucial to understand the tax implications that accompany these transactions.
Capital Gains Tax (CGT) and Income Tax can significantly impact your profits unless certain conditions are met, allowing for tax relief.
(Read Time: Approx. 5 minutes)
Topics Discussed:
- Tax obligations when selling or developing garden land.
- Conditions under which Private Residence Relief (PRR) may apply.
Capital Gains Tax: When and How It Applies
When you decide to sell your garden, the gain from the sale is typically subject to Capital Gains Tax (CGT).
However, there are exceptions, primarily through Private Residence Relief (PRR).
PRR can potentially exempt you from CGT if certain criteria are met.
To qualify, the garden must be part of your main residence, must not exceed the ‘permitted area’, and should not have been used solely for business purposes.
Additionally, if the garden was acquired with the intent to realise a gain or if development work has already started, PRR may not apply.
Understanding the Permitted Area
The permitted area under PRR is generally up to 0.5 hectares, including the area covered by your house.
If your garden exceeds this size, you need to prove that the excess land is necessary for the reasonable enjoyment of the house, based on its size and character.
Without this justification, HMRC might argue that PRR does not apply, especially if the land is sold separately from the house or has been fenced off for development.
Scenarios Where PRR Does Not Apply
PRR relief will not apply under the following circumstances:
- Land Exceeds the Permitted Area: If your garden is larger than 0.5 hectares and you cannot justify the need for the excess land for the enjoyment of the house, the portion beyond the permitted area will not qualify for PRR.
- Business Use: If any part of the garden has been used exclusively for business purposes, that part will not qualify for PRR. For instance, if you leased part of the garden to a business or used it for activities like serving cream teas or running events, PRR cannot be claimed. To avoid this, ensure that any lease or licence for business use is non-exclusive.
- Land Acquired for Gain: If the land was bought specifically with the intention of making a profit, PRR might not apply. For example, if you purchased additional land adjoining your residence for future development or resale, or if planning permission was obtained before or soon after purchase, this might indicate an intent to realise a gain.
- Separate Sales or Development Commenced: If the garden has been sold separately from the house or development has begun (e.g., the land has been fenced off or building work started), it no longer qualifies as part of the residence. In such cases, PRR is denied.
Income Tax Considerations
Apart from CGT, profits from the sale of garden land might also be subject to Income Tax, depending on the circumstances.
This is especially relevant if you are considered to be trading, such as in the case of a developer.
Income from the development and sale of garden land is taxed under the ‘Profits from dealing in or developing UK land’ provisions.
This could result in a higher tax liability than under CGT, as income tax rates can be higher than CGT rates.
Special Cases and Legal Precedents
Several legal cases illustrate the complexities surrounding PRR and garden land:
- Heather Whyte v HMRC [2021] TC08215: In this case, six building plots sold from the grounds of a listed mansion were found to have been appropriated to trading stock before sale, making them subject to Income Tax rather than PRR.
- A Dickinson v HMRC [2013] TC03037: Here, HMRC attempted to deny PRR on the grounds that development had commenced before contracts were exchanged. However, the tribunal ruled that the land retained its character as ‘garden or grounds’ until the actual sale.
These cases highlight the importance of careful planning and timing when considering selling or developing garden land.
Overage Clauses and Additional Sums
If you sell your garden to a developer, you may negotiate an overage clause, allowing you to receive additional sums if the development yields more profit than initially anticipated.
These extra sums are typically taxed as trading income under the ‘Profits from dealing in or developing UK land’ provisions, rather than as a capital gain.
Self-Development: What to Consider
For those considering developing their garden to build new property, there are important tax implications to keep in mind:
- Intention to Sell for Profit: If you plan to develop and sell the property at a profit, this triggers a deemed disposal for CGT purposes, as it is considered an appropriation into trading stock. The profits from the sale of the developed property will then be subject to Income Tax.
- Investment or New Residence: If the intention is to use the new property as an investment or personal residence, different rules apply. The base cost of the land for CGT purposes will be a proportion of the original cost of your home and garden. You may consider triggering a gain on the land before development to increase the base cost, thereby reducing future CGT liabilities.
These cases highlight the importance of careful planning and timing when considering selling or developing garden land.
Summary
The decision to sell or develop your garden involves careful consideration of various tax implications.
By understanding the conditions under which PRR applies and the scenarios that could lead to income tax liability, you can make informed decisions that minimise tax burdens.
Always seek expert advice to navigate these complexities and ensure compliance with tax regulations.
Are you considering selling or developing your garden? Contact Tax Expert today to explore your options and ensure you make the most tax-efficient decisions.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel