Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from September 2006. Older articles are accessed through our Archives page.

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Continuing the series in which our clinic experts provide a guide to those thorny issues that can leave the unwary out of pocket. This week, Maggie Fleming on selling land.

We own a large garden and have often toyed with the idea of enjoying the windfall from selling off part of it to a builder. A good idea?

With housing shortages and property prices remaining high, it is no wonder that many people are tempted to sell off land to developers. And it can be done tax-free. Provided that the land you are selling is actually “garden or grounds” and is not being used for commercial or agricultural purposes, it will attract the Principal Private Residence exemption from Capital Gains Tax (CGT) if the total area of your home plus grounds is less than half a hectare – that’s just over an acre. If that is the case, you should have no problems with Revenue & Customs (HMRC).

It is a big garden – what if we sell more than that?

If your total plot exceeds half a hectare, you will have a fi ght on your hands. You will have to argue that, because of the nature of your home, you need larger grounds to enjoy it. And, naturally, HMRC will respond that if you need those larger grounds, why are you selling part of them off? In this situation, you should seek professional advice at an early stage.

Anything else to watch out for?

One pitfall is to sell the land separately after you have sold your house – this is a real no-no. Because of the way the legislation is worded, any land sold after the sale of the property is taxable in full. You also need to be careful in how you arrange matters with the developer. It’s fi ne to sell a piece of your garden. But if you have an agreement to split the profi ts when the development has been completed, that will be trading, and you could fi nd yourself with a hefty income-tax bill. Building work should not start until after contracts have been exchanged.

Hmm, it still hasn’t put me off. There’s gold in that garden...

Yes, but before you sign on the dotted line, think about how the development might affect the value of your (and your neighbours’) properties. Do you want to live on a building site for months and then have new (and very close) neighbours for the rest of your time in that property.

For three years I have owned a second property which I have been renting out. However, my children are now of an age when they have decided to move out of the family home and I have decided to let them live in my second house at a greatly reduced rent. How do I square this with the taxman? Up to now, I have been claiming all my expenses but presumably this will now change. How much can I claim now? Also, will it have any effect on Capital Gains Tax?

Maggie Fleming writes:

The rules on rental income changed some 10 years ago and were brought into line with those applying to other businesses. So, where a property is let at less than a commercial rent to family members, the expenses do not meet the requirement of being incurred "wholly and exclusively" for business purposes.

However, HM Revenue & Customs will allow you to deduct the expenses of that property up to the level of the rent received. But expenses over and above the rental income cannot be carried forward for use in later years and nor can they be used to reduce the rental income from a different property. If let furnished, the 10 per cent "wear and tear" allowance can still be claimed.

Turning to CGT, the fact that you are letting the property to family members will have no effect. As the house has never been your only or main residence, the gain on eventual sale will simply be the proceeds less costs of acquisition and capital improvements.

Taper relief will also be due. If the house were to become your main residence at some point in the future, it would seem that the further relief of up to £40,000, which applies where a property qualifying for principal private residence relief is let as residential accommodation, would apply not just to the period of commercial letting but also to the period when it was let to your children. The law states that it must be let as residential accommodation but does not specify that such letting must be commercial. If this could be relevant in the future, it would be sensible to draw up proper tenancy agreements with the children.