Disposing of part of your garden

If you're considering selling part of your garden to a property developer, the tax implications are of crucial importance. The disposal of land is a chargeable disposal for capital gains tax ('CGT') purposes. However the key consideration in tax terms will be whether principal private residence ('PPR') relief will operate. Where an individual has occupied a property as a residence either wholly or partly for their period of ownership 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 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). In other words if the garden or grounds do not exceed this area relief for the whole of the garden or grounds is automatically due. Therefore the first consideration when considering a disposal of your garden should be the size of the garden/grounds in question. If they are less than 1.25 acres there should be no problem with the disposal as HMRC traditionally accept that this would be covered by PPR relief. 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. 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 a key issue will be to determine the extent and location of the 'permitted area' for your property, to assess whether the land disposal will fall within this area. If it does PPR relief will, in principle, be available. Aside from simply selling the land to a developer, a further option would be to actually undertake the development yourself and subcontract the work to local builders. The potential profits are greater but what we're really concerned with are the post tax profits. For example its better to make £100K tax free, than £150K that is taxed at 40% or 45%. As regards the building of a new property the first point to consider would be how this activity will be treated for tax purposes. There are broadly two options, either treat it as a capital transaction or as a trading transaction. If the intention in developing the the property was to develop and sell the property with the intention of making a profit, HMRC could argue that you were a property trader. By contrast capital transactions are usually retained for property investments, eg an individual purchasing a property to rent out. The distinction impacts on how any 'profit' is treated and taxed. A property trader would be subject to income tax on any profit, whereas the disposal of a property investment would be subject to capital gains tax ('CGT') on any gain arising. In some circumstances trader treatment can be beneficial, particularly as it allows for a greater offset of expenses. Whether HMRC would agree to capital or trading treatment will depend on a number of issues, including: - Whether you have undertaken this kind of activity before - How long the property will be held prior to disposal - Will the property be rented out - Whether you anticipate doing this again If they accept that this is a capital transaction, this would allow the offset of the various CGT reliefs such as the annual exemption and PPR relief. Occupation of the new property as a residence would be beneficial as this could also allow principal private residence ('PPR') relief to be offset. In addition if you decided to let the property lettings relief could also be offset. One option if a full development of a new property is envgisaged would be to build a new property and then move into this permanently. Provided the 'old' main residence is sold within three years of the date that they move into the new property there would be no CGT charge. Similarly provided the new property is occupied for a sufficient period to make it a main residence there should be no CGT charge on a future disposal of this.