Building a house at the bottom of the garden

Selling part of your garden to build a house may incur tax implications
Feargal McCormack

QUESTION: My family home and garden is in two separate land registrations. The house is in a half acre and is valued at £600,000. The garden is another half-acre and is valued at £200,000.

There is outline planning permission to build two houses on the separate garden registration.

Should I sell both plots with planning permission or should I develop the two houses myself? If I develop the sites should I do so in my own name or in a limited company?

Answer: If you truly have a ‘house and garden of one acre', then there should not be a capital gains tax charge on disposal, even if the property is sold with planning permission.

The fact that the ‘garden' is held under a separate title suggests that it is a piece of adjoining land that HMRC might not accept as being covered under the Principal Private Residence relief.

The possibility of establishing exemption should be investigated – if there is a long history of the two parcels of land being bought and sold together, and the ‘garden' being used for that purpose by whoever occupies the house, it could be justified.

The difference between selling with planning permission and development for letting is so great that they cannot sensibly be compared and contrasted. If capital gains tax exemption can be justified, the sale is a great deal simpler for tax as well as for all other purposes.

The decision really depends on whether you want to be involved in the development and wants to have a long-term investment rather than some cash.

The difference between development as a sole trader and as a company considers many non-tax issues such as limited liability. Looking only at tax, there is a certain simplicity in transferring the property to a company for it to carry out the development.

Whatever capital gains tax exemption is due is then fixed at the time of the transfer and there is a neat cut-off between the personal tax and private occupation on the one hand and the trading activity of development on the other.

Transfer of the land to a company will incur stamp duty land tax on the value at that time. The company can register for VAT to reclaim input tax on the development of the houses and will then need to dispose of them once complete by a ‘major interest grant' to another company – that secures zero-rating for VAT, and a 75 per cent group relationship avoids stamp duty land tax. The second company can then carry on the letting.

If the individual carries on the development himself, he will again need to register for VAT and have a major interest grant of the completed building to recover the VAT on materials. There will then be stamp duty land tax on the developed value rather than the current value.

If there is no disposal of the separate piece of land until some houses have been built on it, it seems that there will be no chance of capital gains tax exemption.

Finally, there are so many factors to take into account that you should take more extended advice – but the transfer to a company to carry out the development has a number of factors to recommend it.

:: Feargal McCormack (f.mccormack@ is managing partner of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept liability for any direct or indirect loss arising from any reliance placed on replies.


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