Buried Treasure at the bottom of your garden or a tax bombshell

Do you have a large garden and are thinking of selling off part as a building plot?

In the event that planning permission is successfully obtained for such developments it can represent a capital windfall to the existing property owner - akin to finding buried treasure at the bottom of the garden! However for the unwary there may well be a ‘tax bombshell’, as Capital Gains Tax could be an issue.

Under the provisions of Section 222 – Section 226 of the Taxation of Chargeable Gains Act 1992 the disposal of a taxpayer’s private residence is given relief from Capital Gains Tax. Very good news, which I suspect is not given a moments thought by many homeowners who are on the move, or who are disposing of part of what they consider to be their garden; it being taken for granted that there is no tax to pay. However this happy assumption can catch out the unwary when it comes to looking at some of the detail of the relief provisions.

The relief only extends to the gain attributable to the disposal (by sale or gift) by a taxpayer of an interest: in a dwelling house which is his only or main residence; or land which the taxpayer has for his own occupation and enjoyment with that residence as its garden or grounds, up to the permitted area (currently 0.5 of a hectare equivalent to 1.235 acres), or such larger area as is required for the reasonable enjoyment of the dwelling house as a residence.

Therefore in any given potential Capital Gains Tax scenario involving a dwelling and/or its garden and grounds a number of steps are necessary to be considered:-

1. What is the entity of the dwelling house;

2. What is the extent of the garden and grounds occupied with the dwelling house;

3. What is the extent of the permitted area if the garden/grounds exceed 0.5 of a hectare – i.e. how much of any garden/grounds exceeding 0.5 of a hectare is required for the reasonable enjoyment of the house as a residence;

4. Establish which part of the garden or grounds is most suitable for occupation and enjoyment with the residence if the total exceeds 0.5 of a hectare;

5. Decide how to apportion the sale proceeds between that part of the property eligible for relief from Capital Gains Tax and the remainder.

Each of these aspects requires careful consideration as the answer to each might not be what vendors innocently assume. Even the Inspector of Taxes seeks specialist help from the District Valuer in order to answer these questions. Therefore it is also advisable for taxpayer’s to seek professional valuation advice, ideally before the event, in order to chart a way through the provisions. Having previously worked with the District Valuer for over 20 years I am pleased now to be able to put my experience at the disposal of individual taxpayers and their accountancy/legal advisers.

Each of the issues referred to above is of relevance both to disposals of a dwelling house with its garden and grounds, and to part disposals when, for example, a portion of the garden/grounds are sold off for development and the dwelling house retained with the remainder.

Obviously if the total extent of the garden and grounds is 0.5 of a hectare or less and the dwelling is a taxpayer’s principal and primary residence then there are no Capital Gains Tax issues likely to arise.

However, if the garden and grounds exceeds 0.5 hectares and the taxpayer disposes either of the whole, or of part of the garden and grounds (for instance for residential redevelopment), then there is exposure to a potential Capital Gains Tax liability unless the Inland Revenue can be persuaded that the area in excess of 0.5 hectares is required for the reasonable enjoyment of the house as a residence. In some circumstances the part disposed of (e.g. a development plot) may straddle the boundary of what might be considered to be the permitted area and the balance of any garden and grounds and therefore an apportionment of the sale proceeds would then be required.

A further aspect to consider is that in the event that a property does have development potential and the taxpayer decides to sell the house first, retaining the plot for future disposal, Capital Gains Tax will then feature on the subsequent disposal of the plot as it would no longer form ‘garden and grounds’ occupied with the taxpayer’s residence.

To secure relief from Capital Gains Tax for garden and grounds exceeding 0.5 of a hectare it has to be shown that this additional area is required for the reasonable enjoyment of the dwelling house as a residence. This has to be an objective test, in effect seeking to look at the property through the eyes of a typical person who would normally wish to live in a house of the size and character of the one under consideration. An individual owner occupier’s specific requirements or preferences cannot be taken as being relevant if they are out of step with the likely general requirements of a typical person.

The above only represents a summary of the issues that need to be addressed and in any particular individual case it is necessary to take specific advice not only from a valuer experienced in dealing with Capital Gains Tax valuation issues but also from an experienced accountant familiar with the finer workings of the Capital Gains Tax legislation.

Lloyd Smale can be contacted at Drew Pearce’s Exeter Office on 01392 201748 or via the website www.drewpearce.co.uk.