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Selling off part of a large garden to property developers has become increasingly common as a way for taxpayers to unlock value from their property without having to sell or downsize.
According to the current tax laws, if you sell your main home, you will typically qualify for PPR (principal private residence) relief and will not have to pay any tax on the transaction. This also applies if you sell part of a property that is designated your PPR, e.g. some of the garden area, provided the right qualifying conditions are met.
This article highlights a recent tax case whereby the owner didn’t qualify and got a shock capital gains tax bill from HMRC. It’s a useful illustration of what to take into consideration if you are interested in exploring a part sale of your home.
Mr A Nunn, the taxpayer, sold part of his garden to a developer, Michael Daly (acting on behalf of his company, M.A. Daly Building Contractors Ltd). Mr Daly was planning to build two new houses on the land he bought.
The sale was due to complete on 7 September 2016 and everything was progressing as expected. Nunn and Daly wanted to accelerate things and entered into a formal agreement that would allow Daly to commence work on the development while the sale was going through.
This agreement was outlined in a letter signed by Nunn and Daly on 2 June 2016, which cited that the decision to commence works early was to take advantage of good weather.
Nunn was planning to claim PPR relief on the land sold because it was part of the garden of his main residence. This would have been straightforward if it wasn’t for the letter and decision to start works before completion.
HMRC argued that because works had begun, the area of land no longer “retained the character of garden at the time of disposal”. It had become a building site before the sale completed and was not available to be enjoyed or occupied as a private garden and part of the main home.
By the time the land sale completed on 7 September, a significant amount of building work had already taken place. For example, foundations of the houses had been poured and scaffolding had been erected for construction of the second storey.
When Mr Nunn made his application, HMRC disallowed PPR relief arguing that Nunn was not able to benefit from his own occupation and enjoyment of the land when the sale took place. As a result, capital gains tax (CGT) of £72,633.80 was charged on the disposal.
The case went to the first tier tribunal (FTT) where Nunn appealed the decision. After analysing the sale documents, the judges ultimately concluded that the agreement reached on 2 June 2016 effectively created a disposal on that date, at a time when the land was part of Mr Nunn’s garden. On this basis they concluded that PPR relief was available, and CGT did not apply to the disposal.
Whilst Mr Nunn was very lucky in the end, he was subjected to a very lengthy, presumably costly, and stressful appeal. This case illustrates how easy it is to unintentionally affect the tax reliefs available when focusing on agreeing a commercial deal, and the importance of taking tax advice at all stages.
If you would like advice on property tax, contact us via partners@rjp.co.uk.
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If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.