Tax implications on the sale of your garden

Most people understand that there is no tax to pay when they sell their own home, this is termed ‘main residence relief’ or ‘principal private residence’ relief for capital gains tax purposes. The mistake often made is that people think of their house and garden as a single entity and assume that if the house qualifies for relief, the garden also gets thrown in to the tax free pot. However, this is not always the case, as land that surrounds a house will not automatically qualify.

Scope of the exemption
The main residence relief applies to a home, or part of a home, that is (or which has been) during the individual’s period of ownership, his or her main residence, and to land which the individual has for his or her own occupation and enjoyment with that residence as part of its garden or grounds, up to the permitted area. The permitted area is generally taken to be 0.5 of a hectare, this area includes the land on which the dwelling house stands. However, in certain cases, a larger area may qualify for relief (see below).

What is a garden and grounds
The following dictionary definition of `garden’ is used by HMRC:

“a piece of land, usually partly grassed and adjoining a private house, used for growing flowers, fruit and vegetables, and as a place of recreation”.

The word `grounds’ implies an area that is bigger than a garden and, HMRC adopt the following definition of `grounds’:

“enclosed land surrounding or attached to a dwelling house or other building which is attached to a dwelling house or other building serving chiefly ornament or recreation.”

Other uses for the land
For land to fall within the definition of `grounds’ that land must be used for ornamental or recreation purposes. It follows therefore that if the land in question is used for other purposes, such as for the purposes of a business or for agricultural or development purposes, it will not be treated as part of the residence’s grounds. As a result, it will not benefit from the main residence exemption.

However, land which has historically been part of the garden or grounds of the residence but which is unused or overgrown at the date of sale remains part of the garden or grounds for the purposes of the exemption. Similarly, land which is used as a paddock or orchard can be within the scope of the exemption, as can land which has another building on it, as long as that building is not used for the purposes of a business.

Land bought at a different time from the house
It is generally the case that a house and its garden or grounds come as a package and are purchased at the same time. However, it may also be the case that some or all of the surrounding land was purchased at a different date. As long as any land purchased subsequently is brought into use as the garden or grounds of the residence, it will qualify for the main residence exemption provided that the other conditions are met.

Land located away from the home
The garden and grounds of a residence normally surround and enclose a residence. Consequently, land that is geographically separated from the residence will not normally be regarded as being part of the garden or grounds of the residence, even if it was bought at the same time as the residence and by the same person.

However, if the land is naturally and has traditionally been the garden of the property, despite being physically separate from it, and has been conveyed with the property, relief will be allowed. However, where a person buys an additional plot of land because they want more garden than they currently have, the separate plot will not be part of the main residence for exemption purposes.

Importance of use of land at date of sale
The test as to whether land surrounding a residence is its grounds or gardens for the purposes of the main residence exemption need only be met on the date on which the sale occurs.

As long as the grounds are used for recreational purpose at the date of sale, they will qualify for main residence relief (as long as the other conditions are met). It does not matter if they have been used for business use previously. Returning land to use as a garden prior to sale can bring it within the scope of the exemption.

Separate sale of house and gardens
The order of sale can be important if the house and gardens are not sold together. The land can only qualify for relief if it is the garden or grounds of the home at the date of sale. If the owner sells off part of his or her garden, while continuing to live in the house, the part sale of the garden will qualify for relief.

By contrast, if the owner sells the house and some of the garden, but retains ownership of the remaining part of the garden, relief will be available for the part of the garden that is sold with the house. However, there will be no relief for the subsequent sale of the retained part of the garden as at the date it is not held together with the residence.

Size
The legislation imposes a limit on the size of garden or grounds that can qualify for main residence relief along with the property. This is referred to in the legislation as the `permitted area’ and is defined as an area of 0.5 of a hectare.

However, where the garden and grounds, including the house itself, cover an area of more than 0.5 of a hectare, relief may be given for a larger area, if such a larger area is regarded as reasonable for the enjoyment of the house having regard to its size and character.

Practical Tip:
It should not be automatically assumed that all land owned with your home would necessarily qualify for main residence relief. The position should be reviewed before a sale and action (e.g. bringing land previously used for other purposes back into use as a garden) should be taken to maximise the exemption.

If you would like to discuss in more detail anything raised in this article, or would like to have a chat about your own personal circumstances, please contact one of our specialist Tax Team on 0845 880 5678 or email action@wrightvigar.co.uk – we would be delighted to hear from you.