Tax when you sell part of your garden

Do you pay tax when you sell part of your garden?

Often not, but it depends on the facts. If the land is part of the garden of the home you live in, you sell it while you still own the house, and it is within the permitted area, Private Residence Relief can cover the gain. If any of those conditions fails, Capital Gains Tax may be due on some or all of the gain.

This guide explains the general position for owners in England and Wales, based on HMRC’s published guidance. It is not tax advice for your situation. Tax depends on your own circumstances, the deal you sign and how the land has been used, so take advice from a tax adviser before you agree terms, and again before you exchange contracts.

We don’t give tax advice and we don’t quote tax rates. What we can do is make sure the deal structure, the timing and the paperwork are clear early, so your adviser has what they need.

What is Private Residence Relief and how does it cover a garden?

Private Residence Relief is the relief that usually means no Capital Gains Tax is due when you sell your main home. GOV.UK says you usually get it automatically if you have one home, have lived in it as your main home the whole time you’ve owned it, haven’t let part of it out or used part exclusively for business, the grounds including all buildings are less than 5,000 square metres, and you didn’t buy it just to make a gain.

The relief covers the garden and grounds as well as the house. HMRC’s helpsheet HS283 says relief can apply to land you occupy as your garden or grounds, up to the permitted area, at the time you dispose of it. That is why selling the end of your garden can be treated very differently from selling a separate piece of land you own elsewhere.

Married couples and civil partners can only count one property as their main home at any one time, so if you own more than one home, check which one counts before relying on the relief.

What is the permitted area?

The permitted area is the amount of garden and grounds that Private Residence Relief can cover. HMRC’s helpsheet says that if your garden and grounds, including the land the house stands on, do not exceed half a hectare, you’re entitled to relief for all of it. Half a hectare is 5,000 square metres, which is just over an acre.

If your garden and grounds are bigger than that, you may not get relief on all of it. The helpsheet says a larger area can qualify if it is required for the reasonable enjoyment of your house as a home, taking into account its size and character. If HMRC disagrees about the size or position of the permitted area, the District Valuer can be asked to decide.

For example, a house on a large plot well over half a hectare, selling land at the far end, could find that the part sold falls outside the permitted area even though it was used as garden. That is a question to put to your tax adviser with a measured plan of the whole property.

Does it matter whether you sell the plot before or after the house?

Yes, the order matters a great deal. HMRC’s helpsheet says you’re not entitled to relief if you dispose of all or part of your garden after you’ve disposed of your home. Selling the plot first, or at the same time as the house, keeps the relief possible; selling it afterwards usually means it no longer counts as the garden of your home.

The date that counts is not always completion. Under the Taxation of Chargeable Gains Act 1992, the date of disposal is normally the date contracts are made. Where a contract is conditional, for example on planning permission, the disposal happens when the condition is satisfied.

That creates a real trap for anyone thinking of moving. For example, if you sign a sale subject to planning, then sell your house before the planning condition is met, the garden disposal could fall after the house sale. If moving is on your mind, tell your tax adviser and your solicitor before you sign anything, so the timing can be planned.

Can fencing off or preparing the plot cost you relief?

It can. HMRC’s helpsheet says relief is not due on land that, at the date of disposal, has been fenced or divided off from your garden for development, or developed in some way. What matters is whether the land is still part of your garden and grounds when you sell.

So keep using the land as garden until the sale goes through. Don’t put up a site fence, demolish garden walls or start clearing for the buyer without advice. Surveys and investigations that leave the garden in garden use are a different thing from dividing it off, but check with your adviser if a buyer or contractor asks for access or works before completion.

Planning applications are often made on land that is still used as garden. HMRC’s helpsheet talks about land that has been divided off or developed, rather than land that simply has a planning application or permission, but confirm how that applies to you with your adviser.

What changes if you sell the plot with planning permission?

Selling with planning permission often means a higher price, and the tax questions are the same ones: is the land still your garden at the date of disposal, is it within the permitted area, and is the house still yours? A plot with permission that is still used as garden is in a different position from one that has been fenced off and prepared for building.

HMRC’s guidance also says Private Residence Relief is not intended to relieve speculative gains or gains arising from development. Relief can be restricted where a home was bought wholly or partly to make a gain, or where money is spent on it wholly or partly for that purpose. Whether paying for a planning application yourself is caught by that rule is a technical point to put to your adviser.

The deal structure matters too. On a sale subject to planning, the buyer normally funds the application and the condition decides the disposal date. On an option, the 1992 Act treats the grant of an option as a disposal in its own right, and if the option is exercised, the grant and the sale are treated as a single transaction. Your adviser will want to see the heads of terms, not just the price.

Is building and selling the new home yourself treated differently?

It can be. HMRC’s business income manual says all profits from a trade of dealing in or developing UK land are subject to UK tax. If you build a house on your garden and sell it, HMRC may see that as a development trade, taxed as income rather than as a capital gain.

Even if it is not treated as trading, Private Residence Relief is about your main home. A new house you build in the garden and sell without ever living in it is not your main home, so the relief that might have covered selling the bare plot is unlikely to help with the profit from the new house.

There is a specific rule worth knowing about. The Income Tax Act 2007 says the transactions in UK land rules do not create an income tax charge on a gain that is exempt under Private Residence Relief. That protects an ordinary garden sale, but it does not turn a building project into a relieved sale.

If you keep the land and have a new home designed and built to let or for family, there is usually no sale and so no gain at that point. The tax questions come later, when or if either property is sold. Take advice from a tax adviser before choosing between selling, partnering and building.

Do you have to report the sale to HMRC within 60 days?

If Capital Gains Tax is due on a sale of UK residential property, GOV.UK says you must report and pay it within 60 days of completion. Completion is the date you stop being the owner, not exchange of contracts. You may have to pay interest and a penalty if you report or pay late.

If the whole gain is covered by Private Residence Relief, there may be no tax to pay. Whether the 60-day rule applies to your sale, and whether a return is needed, should be confirmed with your tax adviser before completion. GOV.UK says people who are not UK resident must report all sales of UK property or land within the deadline, even if no tax is due.

If you do need to report, GOV.UK lists what you need, including the date you acquired the property, the date of exchange, the completion date, the values when you got it and when you sold it, costs of buying, selling or improving, and details of any reliefs you’re claiming. Keep the transfer plan, the contract and any valuations together from the start.

What about Stamp Duty, Land Transaction Tax and VAT?

Stamp Duty Land Tax in England and Land Transaction Tax in Wales are paid by the buyer, not the seller. In Wales, Land Transaction Tax replaced Stamp Duty Land Tax on 1 April 2018 and is run by the Welsh Revenue Authority, which says the buyer’s return and payment are due within 30 days of the day after completion.

VAT does not normally arise on a private homeowner selling part of their garden, but it can come into play where a business is involved or where new homes are built and sold. If your sale is unusual in any way, include VAT in the questions for your adviser.

What should you do before you sign anything?

Get advice early, and give your adviser the facts they need. A short checklist saves time and helps avoid an unexpected bill.

• A plan showing the whole house and garden, its total area, and the part being sold.
• How long you’ve owned and lived in the house, and any periods away or parts let out.
• Whether you plan to move, and roughly when.
• The heads of terms, including the deal type, any conditions and any option fee.
• Any costs you have paid or expect to pay, such as surveys or a planning application.
• Confirmation that the land will stay in garden use until the sale.