Losing the plot

Losing the plot

Key points

What is the issue?

When clients sell their garden for development, the tax rate on any gain realised could range between 0 and 45 per cent, depending on the circumstances.

What does it mean for me?

Practitioners should advise that a thorough analysis be undertaken of the ownership, use, similar previous activity and the terms and timing of the proposed sale.

What can I take away?

Clients should take advice early and before taking action. Documenting the facts on the ground is also key.


In 1628, English judge Sir Edward Coke wrote: ‘For a man’s house is his castle’. This enduring sentiment has not blunted the modern homeowner’s desire to sell off land in the hopes of achieving a handsome profit.

This article looks at the issues the advisor will need to consider in order to advise a client who is considering selling part of their garden for development.

Defining residential property

Residential property gains are subject to capital gains tax (CGT) at 18 or 28 per cent, whereas non-residential property gains are taxed at 10 or 20 per cent. Under sch.1B to the Taxation of Chargeable Gains Act 1992 (the 1992 Act), land is residential property if it either:

  • includes a dwelling at any time during the seller’s period of ownership; or
  • subsists for the benefit of land that included a dwelling during that period.

‘Dwelling’ includes any building suitable for use as such or that is in the process of being constructed or adapted.

Section CG64360 of His Majesty’s Revenue and Customs’ (HMRC’s) Capital Gains Manual (the Manual) defines grounds as ‘enclosed land surrounding or attached to a dwelling-house or other building serving chiefly for ornament or recreation’. Typically, HMRC will treat any land surrounding a house as grounds (and therefore as residential property), unless it can be shown that it is used for some other purpose such as agriculture or trade. HMRC typically treats paddocks and orchards as part of the grounds.

Therefore, the definition of residential property is broad and generally captures garden plots sold for development. This is the case even where clients have partitioned the plot by the time of the sale (more on the dangers of this below).

Application of PPR

Where principal private residence (PPR) relief applies to a residential property gain, no chargeable gain will arise. This is clearly the optimal position for clients.

PPR relief only applies to the ‘permitted area’: either up to 0.5 hectares or such garden or grounds as are ‘required’ for the enjoyment of the dwelling. An eight-bedroom country house will require larger grounds than an urban two-bedroom terrace house.

In Longson v Baker, it was held that ‘“required” means … that without it there will be such a substantial deprivation of amenities or convenience that a real injury will be done to the property owner and a question like that is obviously a question of fact’.[1]

If a client is considering carving off a plot for development, there will be an inference that it is not required for the reasonable enjoyment of the dwelling. That said, s.CG64832 of the Manual offers a helpful example of where this inference could be rebutted: ‘Financial difficulties may force a person to dispose of a piece of land which would otherwise be regarded as part of the garden and grounds required for the reasonable enjoyment of the residence.’

It is, of course, a matter of fact as to whether this is the case for the client in question. Where a client succeeds in establishing that their dwelling requires more than 0.5 hectares of grounds but the required area still falls short of their total grounds, they will additionally need to show that the development plot lies within the ‘most suitable’ garden or grounds to form the permitted area. If the development land is an awkwardly shaped add-on or is located furthest from the house, this might be hard to establish.

Section CG64860 of the Manual includes a list of information that the England and Wales Valuation Office Agency will require when considering what forms the permitted area; advisors would do well to ensure it is readily available.

If the development plot lies outside the permitted area, PPR relief will not be available and the clients will be subject to CGT at 18 or 28 per cent on any gain. Base costs and expenditure will need to be apportioned.

Conversely, if some or all of the development plot falls within the permitted area, that part will automatically benefit from PPR relief so long as, at the time it is sold, it is still being used as the clients’ garden or grounds. Consequently:

  • Clients would be unwise to partition the land prior to sale as this may suggest it was no longer being enjoyed by them.
  • If the client intends to sell the dwelling as well as the development land, timing is key. If the clients convey the house (and do not merely exchange contracts, by concession of HMRC) before exchanging on the development plot, PPR relief will not apply to the plot. This was the trap that snared the respondent in Varty v Lynes.[2]

View to profit

PPR relief is denied under s.224(3) of the 1992 Act if the property was acquired for the purpose of realising a gain. Fortunately, HMRC recognises that all homeowners hope for their home to appreciate in value and acknowledge that this provision is not designed to negate PPR relief in these almost universal circumstances.

In practice, it is rare for this section to apply. If indeed the property was acquired for the purpose of realising a gain, it may be that the ‘badges of trade’ (as established in Marson v Morton and Others)[3] are evident, such that the gain should be taxed to income tax. Advisors should dig deeper to explore if this is the case. Has the client previously sold off land for development? Did they only recently buy their home and immediately look to ‘flip’ part for gain?

Any analysis should consider the transactions in land (TIL) rules, introduced under the Finance Act 2016. The rules are drawn in very wide terms and can catch contracts where the homeowner is entitled to a share of the proceeds on a subsequent sale by a developer (i.e., overage). In these circumstances, the homeowner is taken to share in the proceeds of the developer’s trading activity and the TIL rules may apply to the contingent element of the consideration.

The TIL rules cannot apply where a gain qualifies for PPR relief or would do but for s.224(3) of the 1992 Act. However, if the development plot lies outside the permitted area or was sold after the dwelling then it will not benefit from PPR relief and the TIL rules should be carefully considered.


It may be that PPR relief is not relevant to the clients and, further, they may be looking to sell the dwelling as well as the development plot. In these circumstances, it is worth considering the stamp duty land tax (SDLT) position of the buyer because this could lead to a commercial negotiating point between the parties.

SDLT rates vary across purchases of residential or non-residential property and include a supplemental charge where additional dwelling houses are purchased. The differences are significant: the top rate of non-residential SDLT is 5 per cent whereas a person buying a second residential property can be subject to rates of up to 17 per cent.

The question in these circumstances is whether the development plot is ‘land that is or forms part of the garden or grounds of a [dwelling]’.[4] The answer will be ‘yes’ where the development plot currently forms part of a garden. However, as the land being purchased will not include a dwelling, no second property supplemental charge will apply.

As with CGT, HMRC is strict in its interpretation of grounds. In order to show that land is not part of a dwelling’s grounds, the buyer would need to show that genuine commercial activities occur on it, which would point to the land being non-residential property. HMRC is clear that it will consider the historic use of the land and, therefore, fencing it off prior to sale will not aid the argument that it is no longer residential land.

If the house is sold prior to the development land then, depending on the facts, the buyer may then be able to argue that the non-residential SDLT rates apply as there is no property associated with the land at the time of the purchase. This could represent a valuable saving for the buyer.


This area of the tax legislation is highly fact-specific. To advise clients properly, an advisor must take a full history of the clients’ ownership and use of the property, any similar previous activity, and the terms and timing of the proposed deal.

[1] 73TC415

[2] 51TC419

[3] 59TC381

[4] Per s.116(1)(b) of the Finance Act 2003