The demand for new housing seems almost insatiable as the population of our small island nation continues to grow rapidly, despite falling birth rates and the best efforts (so far) of the Home Office.
Those fortunate enough to have houses on large plots may be tempted to realise development value on slices of land that would otherwise be worth, at best, a few thousand pounds per acre.
Such transactions are often accompanied by friendly tax advice from a neighbour, uncle or family friend who invariably provides supposed comfort that any gain or profit is all tax free because it’s just their garden, or words to that effect.
If only it was that simple … the reality is that property taxation is one of the most complex areas of tax, increasingly so, and sales of (or from) your home, garden and grounds are not exempt from that.
The main relief from capital gains tax that is relied on when selling your home is often referred to as ‘principal private residence relief or ‘private residence relief’ (PRR), and can provide 100% relief from tax in many situations. However it is not the carte blanche that many assume and has some significant limitations.
In addition there are some particularly nasty rules aimed at people carrying out residential property development which attempt, not just to deny relief, but to impose income tax on any gains/profits that are made – at rates of up to 45%. So in a worst case scenario the ill-advised could, far from making a tax free windfall, end up losing the best part of half of the profits they have made on the deal, not to mention interest and penalties that could ensue.
Some common scenarios where you might not necessarily qualify for full relief include:
- Houses on large plots of over half a hectare (1.24 acres)
- Selling part of a large plot and retaining house and garden
- Selling your house but retaining part of the plot for separate development/sale
- Carrying out your own building works and selling the completed project (be wary of the ‘live in it before you sell’ trick)
- Where you have made substantial business use of an area, more than just a home office. Where this applies there are other reliefs that may be available.
The option of ‘winging it’ on some friendly advice is therefore an increasingly risky one given the complexities, the fact that such transactions are on the rise and our understanding that HMRC are increasingly challenging claims for this relief.
As always, our view is that there is no substitute for good quality, timely tax advice. In particular we would always recommend that advice should be obtained prior to obtaining planning permission, and prior to making any physical changes to the land (of any kind) in preparation for sale.
Not only does this give you the certainty of knowing that you are on the right side of the law, but it allows you to benefit from the substantial range of options that are available to mitigate or defer any tax liability, as well as ensuring the right disclosures are made to HMRC and advising how this should be done, so you don’t unnecessarily expose yourself to future tax enquiries.
If you need any help or advice on property taxation rules or more information on the correct way to save tax when buying and selling property, why not contact us for a chat and one of our consultants will be happy to answer any questions you have.