Private residence relief and capital gains tax
When selling a primary residence in the UK, homeowners are generally exempt from paying capital gains tax. This means they’re able to reap the rewards of their property investment without the fear of losing a chunk of their earnings to the taxman.
However, if a property has extensive land or gardens surrounding it, or if part of the garden is sold separately to the property itself, the rules can be less clear. If you’re currently considering selling off part of your garden, or if your house is lucky enough to boast its own fields, woods or other plots of land, understanding the rules regarding capital gains tax is a must if you’re going to protect your financial investment.
Private residence relief
Private residence relief, or PRR, applies to properties that act as the taxpayer’s main or only residence. When the taxpayer sells their property, PRR kicks in, exempting them from capital gains tax and potentially saving the seller a lot of money.
This relief applies to both the property itself and the land that’s used by the homeowner for their own enjoyment. However, the amount of land that’s allowed to be included in the relief is limited and if your garden extends out too far, you may find that PRR doesn’t apply to it all.
What counts as a garden?
The exact size of garden that’s permitted under PRR hasn’t been defined by HMRC. According to the capital gains tax manual, a garden is “a piece of land, usually partly grassed and adjoining a private house, used for growing flowers, fruit or vegetables or a place of recreation’. According to HMRC, gardens are the ‘enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation’.
In general, gardens of up to 0.5 hectares are permitted under PRR. This includes the land on which the property itself is standing. If your garden is bigger than 0.5 hectares, you’ll need to get specialist advice before your property sale to find out which parts of your land are included in PRR and which fall outside private residence relief.
Selling your garden
If you sell your garden, or a part of your garden, separately to your property, it may not be eligible for PRR. If you sell your property before you sell land attached to it, these subsequent transactions may well incur capital gains tax. The best way to avoid paying CGT on the sale of your land is to sell your garden at the same time as you sell your property. A specialist accountant or solicitor should be able to advise you on the best options for your property sale.
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