It is important to be aware of the tax traps and pitfalls involved when considering selling off or developing your garden.

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.

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.

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 the legislation 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 and therefore failed the test.

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.

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 themselves 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.  It is possible to make an election 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).

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.

Up until 2023, there was a perceived trap which would be stored up until the new house was sold. Prior to the Upper Tribunal decision in HMRC v Lee [2023] UKUT 00242 (TCC), it was understood that in such a situation the gain on a future sale would 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 would therefore not be eligible for principal private residence relief despite the fact that the land was part of the old residence.  However, as a result of that case, HMRC now accept that the date of occupation of a residence only begins once the residence has been built and is able to be occupied.  Accordingly, there is no such time apportionment and the full gain should qualify for relief.

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.


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

Richard Coombs 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.

Updated March 2024