Tax implications of selling your garden

With high demand for new housing in the UK, homeowners with larger gardens may consider selling part of their land or developing it themselves. However, tax implications can be complex. While private residence relief may apply in some cases, other transactions could be subject to capital gains tax or even income tax if HMRC deems them as trading activities.

By Tom Annat – Senior Tax Manager

The demand for new housing in the UK continues to be high and the position is unlikely to change in the foreseeable future. In this market, homeowners with larger gardens may be persuaded to sell part of their garden to a developer for a quick gain or they may consider building on it themselves. It is important to consider the tax implications surrounding these transactions, as the results may not always end up as anticipated.

Private Residence Relief

Upon sale of your only or main home, generally speaking, any gain is exempt from capital gains tax. This exemption extends to the garden and grounds the house sits on, as long as the land is enjoyed and used with the main home.

It is possible that a part sale of a garden could qualify for private residence relief if the house has been used by the owner as their main residence. Private residence relief can extend to the garden and grounds automatically on an area of up to half a hectare (including the footprint of the house). The relief can be available for a larger area, but the relief is not automatic. You must be able to demonstrate that the additional area is required for the ‘reasonable enjoyment’ of the property, having “regard to the size and character of the house”. For relief to be available, the land should clearly be used as a garden up until sale. It is also recommended to keep evidence the land being sold has been used as a garden (eg. taking photos).

Capital gains tax or income tax?

If private residence relief is not available, capital gains tax may be due on the arising gain (at rates of 18% and 24%).

Complications may arise where planning permission was acquired before or soon after purchase of the property. HMRC could argue that the land never formed part of the garden (or permitted area) and was acquired with the intention to sell on for a profit. In this scenario, HMRC could consider the transaction as akin to a trade and the resultant profit could be subject to income tax (at rates of up to 45%).

A homeowner may decide to build a property on the land themselves and sell the completed property. Again, care should be taken because HMRC could view this as a trading activity and charge the profit to income tax and not capital gains tax.

Anti avoidance

Further, readers should be aware of the ‘transactions in land’ anti avoidance legislation. This legislation can come into play where the transaction was not in the nature of a trade, but the intention of development was to make a profit, similar to that of a property developer. These rules can result in what appears to be a capital transaction being subject to income tax and not capital gains tax.

Particular attention should be paid to so called ‘slice of the action’ deals. These transactions will often involve an upfront payment for the land. There is then a subsequent payment when then development is completed and sold. This scenario could result in the initial payment being charged to capital gains tax (subject to any available reliefs) but the contingent sum being charged to income tax. However, the position can be complex, and each transaction should be viewed on its merits. It is important to take tax advice at the early stages.

Next steps

Selling part of your garden can be complex and it could be worth seeking tax advice. Please get in touch.