Wheawill and Sudworth's Colin Barratt with some capital advice for homeowners

In recent years it has not been uncommon for homeowners to think about obtain planning permission in respect of their garden in anticipation that any windfall payment on a sale of the garden to a developer will be exempt from Capital Gains Tax (CGT).

However, exemption from tax may not always be available.

As mentioned in my last article, the gain on the sale of an individual’s home is generally exempt from CGT where they have just one home and this has been used as such throughout its period of ownership.

The CGT exemption can also shelter the gain arising on the disposal of land which is occupied and enjoyed with the house as its grounds and gardens, where the area of does not exceed half a hectare (just over an acre).

The exemption applies whether the land was disposed of at the same time as the house, or whether it was disposed of separately before the disposal of the house so long as it was still garden or grounds at the date of disposal.

A gain on the sale of the grounds and gardens sold separately after the disposal of the residence will always be liable to tax.

The timing of the sale is crucial; always sell gardens and grounds before or at the same time as the house, never after the house.

Also, any part of the land which is fenced off from the house to be sold for development will not be treated as being part of the grounds and gardens at the date of its sale, even if the area is less than half a hectare.

The point being that it is no longer occupied as garden or grounds at the date of disposal.

Careful consideration is required when looking at a prospective sale of the land so as not to disturb its status as a garden or grounds otherwise this could lead to an unwelcome and unexpected tax bill.

Where the garden and grounds are in excess of half a hectare, the CGT exemption will only be available where the land is required for the enjoyment of the main house and not the enjoyment of the owners, taking into account the size and character of the house.

In these circumstances, CGT exemption on the sale of larger grounds would need to be negotiated with HMRC.

However, HMRC may see a sale as evidence that the land was not required for the enjoyment of the house and they would then assert that any gain on its sale is taxable unless the disposal was made within the family and the owner was prepared to accept some restriction in the reasonable enjoyment of their residence, or the sale was due to financial necessity.

Evidence would need to be kept to support a claim for CGT exemption in these circumstances in case of HMRC enquiry.

Some homeowners may be able to negotiate the sale of their garden to a developer in receipt of an immediate payment plus future pay-outs depending on the success of the development.

The initial lump sum would be regarded as a capital receipt potentially covered by the CGT exemption but the “slice of the action” payments would be liable to income tax.