Mark McLaughlin points out that the sale of part of a dwelling’s garden before the disposal of the dwelling could have unexpected tax consequences.
Capital gains tax (CGT) relief on a disposal of an only or main residence (or principal private residence (PPR) relief, as it is commonly known) is familiar to many taxpayers.
Unfortunately, the legislation can be difficult, which sometimes leads to misunderstandings and misconceptions about the circumstances where relief is available.
Garden or grounds
For example, in addition to PPR relief being available on the disposal of an individual’s only or main residence, the relief can also apply to the disposal of ‘land which he has for his own occupation and enjoyment with that residence as its garden or grounds’ up to a ‘permitted area’ (TCGA 1992, s 222(1)(b)).
These requirements must be met upon disposal of the land. Thus, if part of the garden is sold after the residence, on a strict interpretation of the legislation a gain on that later sale will not attract relief. This follows from the High Court decision in Varty v Lynes [1976] 51 TC 419. In that case, the taxpayer sold his house and part of the garden in June 1971. He sold the remainder of the garden in May 1972. The taxpayer was held to be liable to tax on that later disposal.
However, if the garden or grounds are sold separately before the disposal of the dwelling house, the disposal may qualify for PPR relief if the other relief conditions are satisfied.
Garden as trading stock
The PPR relief position can be further complicated if (say) part of the garden is being sold to a property developer, and development of the land takes place before its sale is completed. In such circumstances, the homeowner could be regarded as having commenced a property development trade, and to have appropriated the garden to trading stock (i.e., itself a disposal, but on which PPR relief may be available).
For example, in Nunn v Revenue and Customs [2024] UKFTT 298 (TC), in November 1995 the taxpayer purchased a property for £120,000. In 2015, the taxpayer agreed to sell part of the property’s garden to a property developer (MD) for £295,000. MD intended to build two houses on the land, for which MD’s company obtained planning permission in April 2015. However, by 2 June 2016 formal contracts had still not been agreed. MD’s company was keen to begin work on the development. The taxpayer therefore signed a letter from MD dated 2 June 2016, stating that heads of terms had been agreed. MD’s company then erected a fence to partition the land from the remaining garden and began construction work. By the completion date of 7 September 2016, development was significantly advanced.
HM Revenue and Customs subsequently disallowed the taxpayer’s claim for PPR relief. The First-tier Tribunal (FTT) held that the letter of 2 June 2016 was not a contract for disposal of the land. However, there was an ‘adventure in the nature of trade’ and an appropriation to trading stock on that date. On 2 June 2016, the taxpayer had the land for his own occupation and enjoyment with his residence as part of its garden or grounds. PPR relief was therefore available on the appropriation to trading stock on that date.
Practical tip
In Nunn, the FTT observed that the homeowner does not physically need to do the development work for a trade to arise before a sale is completed.
