TT19: Tax-Free Development Gains
In issue 11 of Topical Tips we demonstrated how the Capital Gains Tax (“CGT”) main residence election can be used to secure substantial or total exemption from CGT in respect of holiday homes, even those that are located outside the UK.
We will now address a related issue of particular importance in these times of booming house prices and scarce building land – the sale of part of the garden of the family home for development.
There are a number of pitfalls to side step if such sales proceeds are to be received taxfree. Firstly, the CGT exemption only applies to a dwelling house and garden or grounds up to an acre, including the site of the house. (There are exceptions, for example, if a larger area is needed for the reasonable enjoyment of the house, having regard to its size and character, but for the purposes of this issue of Topical Tips we will focus on houses and gardens of up to an acre. In a future issue of Topical Tips we will consider strategies for larger areas.)
Timing is critical
It is vital to sell the plot of land before the house is sold. In a tax case heard by the High Court in 1976, a Mr Lynes sold his house along with part of his garden, but retained the remainder of the garden and obtained planning permission on the part retained. He then sold this land to a developer some eleven months after he sold the house. The Court ruled that the profit on the second sale was not exempt CGT on the grounds that, when the land was sold, it was not part of the grounds of his main residence.
It was recognised that the CGT exemption would have been available if the land with planning permission had been sold before, or at the same time as, the house.
It should, perhaps, be borne in mind that there exists anti-avoidance legislation that operates to deny the main residence exemption to a gain that can be attributed to expenditure incurred wholly or partly for the purposes of realising a gain. Thus, at face value, it would appear that expenditure incurred in partitioning a garden and obtaining planning permission would fall squarely within this anti-avoidance legislation with the effect that the resultant gain could not be exempt CGT.
Happily, the Inland Revenue have confirmed in writing (Revenue Interpretation 75) that they will not apply the antiavoidance legislation where the relevant expenditure is on obtaining planning permission or on removing restrictive covenants. As long as the Inland Revenue cannot classify the vendor as a property trader, the money received from a correctly timed sale of part of a garden will be tax-free.
Note: The legislation actually refers to half a hectare, which is slightly more than an acre.
Barnes Roffe Topical Tips
- When selling part of your garden, timing is vital. You must sell the land before you sell the house.
- Difficulties can arise if the area of the house and garden exceeds an acre. Always seek specialist advice in such circumstances.
- Avoid incurring exceptional expenditure with a view to maximising the gain to be made. You could lose the tax exemption.