Cash Clinic: Selling off garden plots may provide a fruitful return

A: The capital gains tax exemption for selling your main residence applies to such a sale automatically if the total plot, including the part to be sold, does not exceed one-half of a hectare and your home and garden have been occupied as your sole private residence throughout the time you have owned it. Disposals of parts of larger grounds can be exempt, provided the larger area is required for “reasonable enjoyment” of the property. HM Revenue & Customs may argue that it is not so required if you are happy to sell it but, depending on the facts, exemption may still be argued successfully.

Q: My mother lives on her pensions and savings income, but in the current financial climate she is struggling and needs to generate some additional funds. She has a bungalow with a large garden in one of the nicer coastal villages in East Lothian. She can no longer manage the garden and is thinking of selling a sizeable chunk of it for a housing development and then maybe selling the house and remaining garden separately. What would be the tax implications of this? BB Penicuik

A: Your mother will be hoping that the sale of the plot is exempt from capital gains tax by virtue of the “main residence relief”.

However, there are a number of points on which you may wish to obtain advice, most notably the specific tax position in your situation.

The solicitor handling the sale should be able to help with this. Details of HMRC guidance can be found at www.hmrc.gov.uk/helpsheets/hs283.pdf.

Some of the relevant issues here are: has your mother treated this house as her main home throughout the period of ownership?

Main residence relief only applies to periods where the house was occupied by your mother as her main home. There are rules which may deem certain periods of absence as occupation for this purpose, but they are outwith the scope of this reply.

The main residence relief rules normally only cover house and garden ground up to the permitted 1.235 acres – if the garden is “large”, then this may be an issue. In certain circumstances the area can be extended if this is reasonably required for the enjoyment of the property e.g. to protect a sea view for example. Where the plot sold is outwith the normal permitted area, complications are likely to arise and professional advice should be sought. At the time of sale, the land must be in use as part of the garden ground of the house – it should not be fenced off in any way.

At the time of the plot sale, the house must still be owned by your mother; if it is sold before the land, then there can be no main residence relief for the plot. Bear in mind that the relevant date for determining when land is sold, as far as CGT is concerned, is the date the missives are completed i.e. there is a binding unconditional contract for the sale and not when entry is taken or when the funds are received.

Please also note that if your mother is required to complete a tax return and full main residence relief is available, then the transaction does not need to be reported on the CGT pages of a tax return. However, if full main residence relief is not available, then full details of the gain and the relief claimed must be included in the return.

If your mother does not currently submit an annual return and the gain is not fully covered by main residence relief, your mother has a responsibility to notify HMRC of the need to submit a tax return. Assuming the sale takes place in the current tax year, the notification needs to be made to HMRC by 31 October, 2012, the return is due for submission by 31 January, 2013, and the tax would fall due on the same date.

• Neil Whyte is a tax partner with accountants and business advisers PKF and Glen Gilson is a partner and head of the private client & financial services at HBJ Gateley.