If you find yourself in possession of a large plot of land that you no longer need but don’t want to move from your current home, selling part of it for development can be an attractive option. However, it’s important to consider the tax implications associated with this decision. In this article, we’ll guide you through the key considerations and provide expert advice to help you navigate the tax landscape effectively.
Tax Considerations for Selling Your Garden
From a tax perspective, there’s a distinction between selling a portion of your garden to a developer and developing the land yourself and then selling the properties you’ve built. It’s essential to grasp this difference to make informed decisions and optimise your tax situation.
Private Residence Relief: The Benefits of Selling Part of Your Garden
If you sell a section of your garden while the attached property is your primary or sole residence (or has been at some point), you may be eligible for private residence relief on any gains made from the land sale. This relief can significantly reduce or even eliminate your tax liability, presenting a valuable opportunity.
Defining ‘Garden’ for Tax Purposes
Private residence relief applies to a property for the duration in which it has been the owner’s primary or sole residence, as well as during the last nine months of ownership. The relief also covers land that is used and enjoyed by the owner as gardens or grounds, up to the permitted area of 0.5 hectares. In certain cases, a larger area may be considered reasonable based on the house’s size and character.
To qualify, the land should generally be enclosed, surrounding, or attached to the property, and primarily used for ornamental or recreational purposes. Land used for business or let out to others does not qualify, nor does land that has been fenced off for development at the time of disposal.
Order of Sale and Development Considerations
If you sell some or all of the land separately, private residence relief will only apply if the sale occurs while the property eligible for main residence relief is still owned. Once the main residence is sold, the land is no longer considered “enjoyed” with the main residence, and the relief no longer applies. This determination is made at the date of sale.
Potential Pitfalls: Developing Your Garden and Tax Implications
Proceed with caution if your plan involves developing the garden yourself. Private residence relief does not apply if you have fenced off a section of your garden for development or if development work has commenced. In such cases, the land is no longer considered part of the garden, enjoyed as the main residence. Any value generated from the development is likely to be taxed as a trading profit, although gains made until the point it ceased to be used with the main residence may be subject to capital gains tax.
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