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 that this is structured in the best way and that an unexpected or unnecessary tax charge does not arise.
Principal Private Residence (PPR) points to consider
Size of land being sold
PPR is generally only available if the land sold is up to half a hectare (approximately 1.2 acres) anything larger and it is necessary to look at it in more detail.
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. 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 rent out or sell the exiting home.
Depending on timing part of the gain on the sale of the existing property maybe subject to tax if full PPR 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 so would be taxable. 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) then this could mean that the profits are regarded as trading income not capital which comes with a higher tax cost (possibly 45% compared to 28%). Whether this is the case will depend 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 falling to be trading rather than capital even if 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 in a company rather than personally? Again this will depend on the facts.
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.