Pressure on local authorities to increase the housing stock in the UK has meant that more and more home owners have had success in obtaining planning permission and selling part of their garden to a developer or developing the land themselves.
The tax implications of such transactions are not straight forward. One needs to consider whether the transaction is a capital transaction or if it constitutes a trade and is therefore, at least partly, liable to income tax.
Trading or Capital
Normally HMRC will accept that the transaction is a capital one, if the only way you have enhanced the property is by obtaining planning permission.
However, if you purchase the property with a view to making a profit on the sale of the garden then HMRC would argue that it is a trading transaction and liable to income tax.
Similarly, if you develop the land yourself or are entitled to a profit share on the eventual sale of the developed property, you would be deemed to be trading and at least part of the profit will be liable to income tax.
Principal Private Residence (PPR) Relief
If the transaction is capital in nature, then it is possible PPR relief is available. PPR relief allows gains on the sale of the majority of main residences to be free from tax entirely. You can sell part of the garden and still qualify for the relief.
The relief extends to land of half a hectare (including the plot of the dwelling house), but this can extend to a larger area where it was required, for the reasonable enjoyment of the residence.
Therefore, if the garden being sold has been used as part of the residence and is within the half a hectare, it should qualify for PPR and no tax would be payable on disposal.
If it is outside the half hectare, you would need to be able to show that the larger grounds/garden were necessary for the reasonable enjoyment of the property. This could be difficult to prove as the fact that you are selling the garden separately from the main house would indicate it was not required for the reasonable enjoyment of the property.
However, there could be circumstances where you had to sell the land, for example out of financial necessity, and relief may still be available in this scenario.
How we can help
If you have any questions, our team of expert Accountants would be happy to assist.
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.