Building in your garden and tax
Garden Grabbing in 2018 & Capital Gains Tax on Self Build Property; Taxation FAQs regards Gardens & Residential Developments
The price of residential development land has soared in light of the demand for housing.
One consequence has been a rise in homeowners selling off their gardens which can then be used for residential development.
Most homeowners do not need to give much thought to the tax implications of selling their home since if it is the only property they own, and they have lived in the property throughout their ownership of it, any gain arising on its sale is covered by main residence relief. But does the same apply to selling off part of your garden?
The answer to this depends on a number of factors including whether the intention is to live in the new property.
Gardens and Principal Private Relief
Principal private residence (PPR) relief can also apply to gains arising on the disposal of the gardens as the relief only applies automatically where the footprint of the property, including the gardens, is no more than half a hectare in area (1.2 acres). A larger area may be justified where required for the ‘reasonable enjoyment’ of the property. If the land is not used for the enjoyment of the property, then this will not be covered by PPR relief and the gain on a part disposal of the property will need to be calculated.
If the gardens are sold direct to developers, then it is likely that this will be considered to be a capital disposal for the homeowners. As this is a part disposal of a residential property, tax legislation tells us that land that forms part of a garden or grounds of a residential dwelling is considered to be residential even if it is sold separately to the property, therefore the residential rates of capital gains tax will apply (to the extent that the gain is not covered by PPR relief).
These are currently 18% for gains that falls into the basic rate tax band and 28% for gains falling into the higher and additional rate tax bands.
Planning Permission and Property Development
If the homeowners have applied for planning permission for residential properties to be built on the garden land, will this taint the capital disposal rules and push the homeowner into the trading tax rates?
This would depend on a number of factors including the intention towards the land upon purchase, whether any of the development work will be carried out when under their ownership, whether any further improvements have been made to the land to make it more appealing to sell and if the individual has been involved in similar projects in the past.
Those looking to develop the property themselves should give careful consideration to how the property development is structured. For example, should it be held jointly with a spouse or partner in order to utilise more than one allowance and the lower rate tax bands? Should the new house build be run through a company in order to use the lower corporation tax rate of 19% (reducing to 17% in 2020)? If the build is completed within a corporate structure, is there an optimal time to transfer the land or building into the company? Consideration should also be given to VAT.
Further tax implications of building in your garden; some considerations
While these are considerations for the current owner, there are also tax implications for the prospective purchaser of gardens or grounds of a dwelling with an eye to the construction of a new residence, in particular, stamp duty land tax.
HMRC have recently published their views regarding stamp duty land tax (SDLT) and gardens (read more).
SDLT is charged on the consideration for the land or property purchased, with equivalent principles in Scotland under the Land and Buildings Transaction Tax and Wales under the Land Transaction Tax.
HMRC states that for SDLT purposes if the gardens or grounds sold are the gardens of grounds of a building used or are suitable for use as a dwelling, those gardens or grounds are considered to be residential. This is regardless of that fact that the dwelling is not being sold at the same time and the same applies where the land sold is considered to be separate from the dwelling, i.e. it has been fenced off.
If the dwelling in question is derelict (i.e. no longer habitable) or has been demolished, then the grounds are no longer considered to be residential and the non-residential rates of SDLT are therefore chargeable.
Therefore, it is likely that in most cases where an individual sells off part of their garden, the purchaser will be subject to the residential rates of SDLT.
This is a complex area of taxation and professional advice should be sought. If you require assistance with calculating any taxable income arising on residential property or the development of residential property, our specialist advisers would be happy to help.