Building A Property In Your Garden: The Potential Tax Implications
With an ever-increasing demand for housing and a limited amount of land available, you may be considering whether a property could be built in your garden.
Clearly, this could be very financially rewarding for you; however, there are some important tax considerations that you should bear in mind. This article will consider the potential capital gains tax and income tax implications of 1) selling part of your garden to a property developer, 2) self-building a property in your garden for onward sale and 3) self-building a property in your garden to let to tenants.
1)Selling part of your garden to a property developer
If you sell part of your garden to a property developer who will develop the land and later sell the developed property, this will be a part-disposal for capital gains tax (“CGT”) purposes (as you are retaining some of your garden and the land where your house is). Therefore, CGT may be payable by you.
However, as mentioned in our previous blogs, on the sale of a house that you have lived in as a main residence, Private Residence Relief (“PRR”) is typically available to reduce the gain by reference to your ownership period and the length of time that the house has been occupied as your main residence.
PRR applies to both the site of the property and its surrounding gardens and grounds, provided that the total area does not exceed 0.5 hectares.
Therefore, if the part of your garden that is being sold falls within the above definition as part of your main residence PRR should be available, any capital gains that arise on the disposal should be reduced to nil and there should be no CGT payable.
If the site does exceed 0.5 hectares, then PRR relief may still be available if it can be demonstrated that the larger area is required for “ the reasonable enjoyment of the dwelling house . . . as a residence, having regard to the size and character of the dwelling house”. However, this should be approached with caution as the fact that you’re disposing of part of your garden is itself evidence that it is not required for the reasonable enjoyment of the property. Please see our blog on this for further details.
2)Self-building a property in your garden for onward sale
As an alternative, you may decide to self-build a property in your garden and then sell the developed property yourself (and you’re not in business as a builder or property developer).
Where the reason for developing land is to make a profit on its disposal, HMRC are likely to view the profits as either trading profits under the normal “Badges of Trade” rules or a deemed trading profit under the Transactions in UK Land rules. This will result in the following tax implications:
- When you start to develop the property (i.e. start the deemed trade), the part of the garden that you are developing is deemed to be brought into the business as trading stock. This constitutes a deemed part-disposal at market value by you personally. Therefore, CGT may be payable by you. However, as described in point 1 above, PRR may be available if the relevant conditions are met in relation to the part of your garden which is being developed.
- On the eventual sale of the property, any profits on this disposal will be chargeable to income tax (at the higher income tax rates), as opposed to CGT. National Insurance Contributions will also be payable if you are treated as carrying on a trade.
If you are planning on self-building a property in your garden, consideration should be made as to whether the new house should be built via a limited company and to VAT.
3)Self-building a property in your garden to let to tenants
If you self-build a property in your garden with the intention of letting the property to tenants on a long-term basis, HMRC are not likely to view this as a trade because the intention is to generate an income stream (and not to make a profit on disposal).
If you dispose of the property after it has been let out on a long-term basis for a significant period of time, income tax is unlikely to be payable on the eventual disposal and there should be no deemed disposal by you when the development begins. Instead, this will be a part-disposal for CGT purposes and should be chargeable to CGT. However, PRR will not be available for the period prior to the development because the land referred to in point 1 above must remain part of the garden at the time of sale.
It should be noted that HMRC often look closely at land transactions. We would therefore recommend speaking to a member of our team if you are considering any of the above options so that you are confident of the applicable tax treatment and your obligations.