It is well known that if you make a gain when you sell a property that has been your “only or main residence” throughout your ownership of it, that gain will be exempt from capital gains tax (“CGT”).
This exemption generally extends to the “garden or grounds” of the property, but there are several pitfalls to be aware of:
The “permitted area”
Up to half a hectare (1.24 acres) of grounds are automatically exempt. If your garden is bigger than this, you will need to persuade the taxman (in the shape of the District Valuer) that this larger area is “required for the reasonable enjoyment” of your residence, “having regard to the size and character” of the house.
The best evidence for this is likely to be the existence of similar houses nearby with similar gardens.
Where the grounds are more than half a hectare, and part of the garden or grounds are sold (perhaps to a developer) while the house and the rest of the garden are retained, HMRC will usually argue that the fact that you are prepared to go on living there after the sale shows you did not need the land sold for the “reasonable enjoyment” of your property. The most likely ways to defeat this argument are if you can show that the sale was to a close friend or family member (on the basis that you were prepared to make a sacrifice to help them out), or that you were in need of cash and selling the land was the best way to raise it.
Location of garden
HMRC will generally resist giving relief for a garden that is not part of the land on which the house is built, even if it is less than half a hectare in size. If you are a keen gardener with a small garden, but also own more land nearby which you also use as a garden, you are unlikely to get relief for that land. The exception is where you can show that the land concerned is naturally part of the garden of the property, perhaps because it has been sold with the house on previous occasions. There were some houses near where I used to live in London which had their gardens opposite them, across the road, and I have seen similar arrangements in some villages. These would be accepted as part of the garden of the house, and so exempt.
Timing of sale of garden
If you are selling your house and your garden to different purchasers, even if the garden is less than half a hectare, make sure you sell the garden before the house. This is because the test of whether it is your garden or not is done at the time you sell it; so if you have already sold the house, you cannot say it was in use as your garden at the time you sold it!
Use for other purposes
Where a house has been used for other purposes than as your home during your ownership, some of the gain may be taxable. The gain is time-apportioned between periods when the property was your main residence and when it was (for example) let out. This does not apply to the garden. The test for exemption for the garden is a “snapshot” of the use of that garden at the time the property is sold, so if the garden is being used as the garden of your main residence at the time you sell it, all the gain on the garden is exempt, even if it has been used for other purposes during your ownership of it. Conversely, if it is not being used as part of your garden at the time of sale, it will not qualify for relief, even if it has been part of the garden for most of the time you have owned the property.
Buildings on land
If there is a building – say, a barn or a garage – in your grounds, then provided it is within the “permitted area”, it will also be exempt as part of the garden or grounds of your main residence, provided it is not being used for some other purpose (such as being let, or used for your business) at the time you sell it.
If, for example, your half hectare of garden includes a garage you rent out to a neighbour, then if possible, stop renting it to him before you sell the house and garden, so that you qualify for the full exemption on the garden.