Questions on avoiding capital gains tax on sale of development plots in garden
Question: I live in Kent in a large detached property, sitting on around 2.5 acres.
I have obtained Outline Planning Permission to build 2 additional properties within my garden.
One site is approx 1/3 of an acre and the other is 2/3 of an acre.
I have identified 4 options and would like to know the CGT implications of each:
Option 1. I simply sell my current house together with the 2 sites. Option 2. I just sell the 2 development sites ( to 1 purchaser ). Option 3. I sell the 2 development sites but to different purchasers. Option 4. I sell my own house and 1 site, and then build a new home on one of the sites.
Can you let me know what the options are to avoid or reduce capital gains tax based on these options?
Answer:
Your question concerns the availability of principal private residence ('PPR') relief on a disposal of the land.
Where an individual has occupied a property as a residence either wholly or partly for their period of ownership then a proportion of the capital gain resulting on the disposal of the property is exempt. This is calculated on the following basis:
Capital gain x period of occupation/period of ownership
In your case, assuming you have occupied the property for your entire period of ownership, any gain on a disposal of the property would be exempt from CGT.
However, when a residence has gardens or grounds with it, the extent of the garden or grounds of a person's residence which automatically qualifies for relief is 0.5 hectares (approx 1.25 acres) ie if the garden or grounds do not exceed this area relief for the whole of the garden or grounds is automatically due.
If the garden or grounds exceed this relief may be available for a larger area if the grounds are required for the reasonable enjoyment of the dwelling house as a residence, having regard to the size and character of the dwelling house.
As the land in your case exceeds 1.25 acres, it is necessary to show that the grounds are required for the reasonable use and enjoyment of the property.
This is frequently a matter that will be looked at by the district valuer, and he will bear in mind:
- the size and character of the dwelling house - what part of that dwelling house has been used as its owner's residence. - what land is required for the reasonable enjoyment of that residence.
Note that the permitted area (ie the area that meets the reasonable use and enjoyment test) is a specific area, and as well as determining the extent of the permitted area the District Valuer will determine where the permitted area is.
Each disposal of a piece of land which has been part of the garden or grounds of a residence can attract private residence relief if some or all of the land sold falls within the permitted area.
Therefore in your case, the key issue will be to determine the extent and location of the 'permitted area' for your property, to assess whether the land disposals will fall within this area. If it does PPR relief will, in principle, be available.
Looking at your options Option 1 - you would need to show that the entire property & grounds fell within the permitted area to obtain full PPR relief
Option 2 & 3 - The problem here is that a separate disposal of part of the garden or grounds of a residence may be regarded as evidence that the part disposed of was not required for the reasonable enjoyment of the dwelling house as a residence.
You may therefore need to show that there were other reasons for the disposal of those particular parts eg financial, not related to the enjoyment of the property.
In addition, care must be taken of the various anti avoidance provisions. If the Revenue believe that expenditure is to be incurred for the purpose of realising a gain (eg if you developed a property yourself) they could refuse the benefit of the PPR provisions.
Under self assessment, it is for you to self assess your liability, and if any gain is completely covered by PPR relief, it need not be reported on the self assessment return.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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