9 Jun 2006

Tax Position of Garden Building Plots

If you are in the fortunate position of owning a house with a large garden, you may well be sitting on a considerable tax-free asset, for garden sub-divisions are one of the main routes for new building plots to come to market.

The tax exemptions which apply to your Principal Private Residence (i.e. your main home) extend to the garden, provided the site as a whole is less than half a hectare, which is 5,000 sq metres, or just over an acre. This means that if you sell off part of your garden to a developer, you won’t have any tax levied on the windfall gain. Whether this is a sensible provision on the part of the Treasury is pretty questionable, but that’s the way it’s always been in the UK. It’s only in the past few years that people have started selling off the back garden for hundreds of thousands of pounds.

But there are one or two things that you need to be aware of, because it’s not quite as straightforward as it might be. HM Revenue & Customs have recently published some guidance on these issues because one or two court cases have set precedents about what should and what shouldn’t be taxed.

1. It is important that the garden land is just that. It mustn’t be being used for commercial or agricultural purposes at the time of sale.

2. There can be buildings on the land but they too should not be being used commercially

3. The plot should be sold unfenced and whilst it is still garden. If the building work has started before the land exchanges hands, then it may be regarded as developing and get taxed accordingly.

4. Joint ventures agreements with the developer will be frowned upon. You can’t, therefore, agree to split the profits when the finished house is sold.

5. Sometimes an area larger than half a hectare will be regarded as being part of your Principal Private Residence if, for instance, you have a very large garden and are only selling off a small part of it. However, you have to argue this point with the district valuer before the transaction takes place.

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