This article appeared in the Yorkshire Post on Saturday 13th January 2007.

Taxing Times: Sale Of A Garden

Duncan Meredith Senior Tax Consultant

This week we examine the sometimes complex rules that have to be considered when planning a sale of a garden connected to a main residence.

We have looked before at the capital gains tax treatment of the sale of a main residence. This time we consider the position when a sale of all or part of a garden is contemplated. There is still a healthy appetite for maximising the return from property and gardens (especially large ones!) are prime targets for builders looking to carry out housing developments. In the face of potentially substantial capital gains tax liabilities, the obvious place to start is whether principal private residence relief (PPR) is available to see if the gains can be reduced.

As always, obtaining planning permission will cause the land to increase in value. This increase can be substantial. The maxim is to seek advice at an early stage; if PPR does not apply there may be a large tax bill to pay, although even then much can be done if it is looked at in time. Certainly, don’t wait for the gain to have happened before you decide to do anything about it.

Assuming that the profit on sale will be taxed as capital, a liability would normally apply except for the long-standing PPR exemption for a main residence and its grounds. This can in itself be complex, with special rules to cover partial occupation, second homes, living away and lettings, but this article confines itself to the particular problems associated with a sale of the garden itself.

Most importantly, to get relief for the garden it has to be land which is occupied and enjoyed with the residence as its garden or grounds. Over the years, there have been several Court cases that have clarified what is allowed.

First, if the total area of the residence (including the site of the house and the garden) is less than half a hectare (about one and a quarter acres), full relief applies. If the area is larger, there may be a restriction unless it can be shown that ‘it is required for the reasonable enjoyment of the house, having regard to its size and character’. This is very subjective and there can be much argument on this point, including what is required, as opposed to desirable! If for sale, is it ‘required’? It may be that swimming pools, tennis courts and even cesspits are very handy things to have! The circumstances of the acquisition and the sale may be examined. Similar houses nearby will influence the situation, and it is the position at the time of sale that matters; changed circumstances may make a difference.

Following on from this is the fundamental fact that the garden cannot qualify for the relief if the house has already been sold. If selling both, the garden must go first, or both at the same time. Otherwise, the gain on the sale of the garden attracts no relief.

There may be difficulty obtaining the relief for separate areas fenced off from the garden, or perhaps with an intervening service road. The basic definition of a garden is ‘an enclosed piece of ground devoted to the cultivation of flowers, fruit or vegetables’ but the exemption extends to grounds, which must be ‘enclosed … chiefly for ornament or recreation’. That rules out e.g. a former commercial orchard.

Normally, the sale of a garden will be the realisation of part of your collection of ‘capital’ assets and would not be treated as a trading activity. But again, this is not always free from doubt. Seek advice early to avoid falling into one of the many traps in this area, when the tax rates on profits can be high.

Even so, if after all the above has been examined, there is a net gain, other planning can be considered so the final tax bill is as low as possible.

Garbutt & Elliott are Chartered Accountants and Tax Advisers with offices in Leeds (0113 2739600) and York (01904 464100). Duncan can be contacted at the York office, or by email to dmeredith@garbutt-elliott.co.uk.