With land in many parts of the country being at a premium, what potential tax issues should a home owner be aware of if they decide to harvest the wealth that has being growing in their back garden.
In many cases, if you sell your only or main home, any gains from the sale will be tax free if you qualify for a capital gains tax relief known as the Principal Private Residence (PPR) exemption.
However, if you are going to sell or develop part of your garden this may not always be the case. Care should be taken to ensure ones plans are structured in such a way that does not bring about any unexpected or unnecessary tax charges.
Principal Private Residence (PPR) points to consider
Size of land being sold
PPR Relief is generally only available if the land sold is up to half a hectare in size. (approximately 1.2 acres). Anything larger than this and it is necessary to look at both the disposal and the relief in more detail – Full PPR Relief may still be available!
Land must be part of the garden
The land must be part of the garden and remain so at the time of sale or NO relief is available. The time of sale is the time an unconditional contract is entered into i.e. exchange of contacts, and NOT completion.
Be careful not to separate off the garden (e.g. fence off), obtain a separate title or start developments before this date.
If land is owned with the property which is not part of the garden, e.g. a paddock, this is unlikely to qualify in any case.
Building a new house for your personal use
Perhaps you wish to build a new property in the garden for you to move into, and then subsequently rent out, or sell, the exiting home.
Dependant on the timing, part of the gain, on the sale of the existing property, maybe subject to tax if full PPR Relief is not available.
Also, when the new property is sold part of the gain, relating to the time the old house was owned, would not be covered by PPR Relief and so would be subject to capital gains tax. There are ways to structure this to ensure this problem does not arise.
Development of the garden
If you are to be involved in the development and sale of the new property(s) this could mean that the profits are regarded as trading income, and not capital. Trading income may be subject to tax at the maximum rate of 45%, compared to Capital, which may be taxed at just 28%. The tax treatment will be determined based on the facts and structure of the development.
Merely entering into an option to sell part of your garden to a developer if planning permission is obtained and then selling the land to the developer should not mean that the proceeds are treated as a trading receipt.
However, if instead you plan to develop and sell the new property(s) then this will result in the activities being deemed as trading in nature, rather than capital, even if it is a one off. In this case it would be worth considering the structure of this development, e.g. would it be tax efficient to develop the land within a company rather than personally? Again, this will depend on the facts and each individuals particular circumstances.
What now?
As with most ‘tax related things’, the devil is in the detail. Careful planning and obtaining an early appreciation of the potential tax issues that may arise are vital in order to minimise any potential tax exposure.
If you are considering a sale or development of your garden and would like to discuss any potential tax issue further, please contact Lucy Mangan by email at LMangan@menzies.co.uk or by phone on 01784 497169.