Gold in the garden – but watch for the pit traps!

By Graham Buckell

Over the years the trend has been towards smaller and smaller gardens, reflecting the increasing cost of land. Some, owning houses with particularly large garden areas, may be tempted to sell or develop part of their garden. Often principal private residence relief will apply to exempt the capital gain but there are a number of traps to watch for.

Statutory references are to TCGA 1992 unless otherwise stated.

Permitted area

The overriding rule is that only total land (including the land occupied by the house) up to ½ hectare (1.2 acres) is automatically exempt. Anything in excess must be justified as being ‘required for the reasonable enjoyment of the dwelling house’ (s 222(3)). Note the word required. The High Court and Tribunals have interpreted this as necessary rather than merely desirable. Also this is measured by reference to the house – not the particular occupier. Thus, for example, an occupier with an interest in horses might regard a large area as necessary but a different occupier might not need so much land.

Selling some land whilst retaining the house and the rest of the garden makes the argument for a larger permitted area particularly difficult but not impossible. HMRC (at CG64832) give two examples where it might be acceptable:

  • A disposal to a family member
  • A disposal due to financial necessity

Even if it is not possible to argue for a larger permitted area it is important to consider precisely what land should be regarded as within the permitted area. Thus, for example, if the land being sold is closer to the house with part of the retained land further away, one might be able to argue that the whole of the area sold is within the permitted area. The legislation, in s 222(4), deems the permitted area to be that part ‘most suitable for occupation and enjoyment with the residence’.

A variation to this is where the land sold is partly within the permitted area. It may be possible to argue that the land beyond the permitted area (e.g. protected trees) is worth less than the land within the permitted area.

Timing of the sale

The land must remain part of the garden at the time of sale otherwise relief is lost completely. This is based on the fact that s 222(1)(b), which refers to the sale of land, is written in the present tense. This view was upheld in the High Court in the case of Varty v Lynes [1976] STC 508 where the house and part of the garden was sold prior to the sale of the remainder of the garden.

For this purpose it is important to remember that the date of sale is the date that contracts are exchanged unconditionally rather than date of completion, if later.

However, note that it would be possible to exchange contracts to sell the house and some land and later exchange contracts to sell the remaining land provided that the first contract had not been completed at the time of the second sale.

On a similar vein, one should avoid separating the land from the house by, for example being fenced off, separate title created or development work commenced until after unconditional contracts have been exchanged. This principle was illustrated in the case Mrs A Dickinson v HMRC, FTT [2013] UKFTT 653 (TC) where some initial development work started before exchange of contracts. HMRC argued that the land had been separated but, fortunately for Mrs Dickinson, the FTT accepted based on the facts in that case that the land remained part of the garden on the date of exchange.

Self-development – trading stock

If the land owner chooses to develop the land himself for ultimate sale the land will become trading stock of the development business.

An appropriation of land to trading stock triggers a deemed disposal at market value for capital gains tax purposes (s 161(1)). It is possible to make an election under s 161(3) to transfer the land into stock at cost but, provided principal private residence wholly or largely covers the gain, it will be unadvisable to do so.

Of course, if the development is to be undertaken via a company, which will often be considerably more tax efficient, the land owner will generally wish to sell the land to the company at market value to trigger the principal private residence relief although there will probably be a stamp duty land tax cost (but see below).

In a case where the land to be sold is clearly beyond the permitted area the gain will be taxed at the upper rate (currently 28%) as it will be regarded as a disposal of a UK residential property interest (see Sch B1, para 1(2)(b)).

Where the intention is to self-develop using a company, this might suggest the following strategy

  • Commence the development as an individual (or, better, as a partnership with a spouse perhaps)
  • Appropriate the land to trading stock
  • Elect to transfer the land into trading stock at cost
  • Sell the business with the land at cost to a company (this is where a partnership will be helpful as it should be possible to avoid stamp duty land tax by reason of FA 2003, Sch 18, para 18).
  • Elect to transfer the land to the company at the price paid (i.e. cost) under ITTOIA 2005, s 178.
  • The company develops and sells the land generating profits to be taxed at the corporation tax rate (currently 19%).
  • The original cost of the land can be withdrawn tax-free leaving the balance to be dealt with as the shareholders see fit – probably liquidate with the benefit of 10% capital gains tax if no other development is planned within the following 2 years and the company has traded for at least 12 months.

Note here that the tax saving may be modest. A personal capital gain at 28% matches against corporation tax at 19% plus capital gains tax at 10% on the remaining 81% – 27.1% overall. There should be a timing benefit as well. The decision here may turn on what is planned for the company post development.

Self-development – occupy new house

Sometimes land owners wish to build a new house in their garden for their own use with the intention of selling or, perhaps, renting out the old property.

The trap here will be stored up until the new house is sold. On that sale, the gain will be time apportioned between the period the new house existed and the period going back to when the old house was purchased. The gain attributable to the earlier period will not be eligible for principal private residence relief despite the fact that the land was part of the old residence. The trust could be wound up later by appointing the property back to the settlor or the trust could continue to hold the property relying on s 225 for principal private residence relief in due course.

Note that time apportionment is obligatory – see s 223(2).

Whether this issue would be remembered on a sale in many years’ time is a moot point but, to play it safe, it is necessary to engineer a disposal of the building plot whilst it remains part of the garden of the old house. This could be achieved, for example, by transferring the land into a trust for the benefit of the land owner. The trust will then have an acquisition date immediately prior to the construction of the new home.

The practice

In theory a taxpayer should self-assess any capital gain that is not covered by principal private residence relief. Where there is uncertainty, at minimum the taxpayer should disclose this uncertainty. In practice, a taxpayer may not be aware of these traps and a tax return is submitted omitting the land disposal on the basis that it is fully exempt. As mentioned in the previous paragraph, this must be a likely scenario in a sale many years after the original development. This puts the onus on HMRC to open an enquiry which may include a discovery assessment when the enquiry window has expired.

In the case of Mrs Dickinson mentioned above, it is interesting to note that HMRC opened an enquiry well within the 12 month window. The case notes do not say why an enquiry was opened.


The above points illustrate well the point that tax is a creation of law and that it can often operate in a capricious way if care is not exercised.

Graham Buckell is a partner with Bates Weston Tax LLP, specialising in providing tax advisory services to other firms of accountants as well as clients of Bates Weston LLP. He can be contacted on 01332 365855 or

As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.