Investing in gardens

If you want to cash in on a garden, do your homework first

On the face of it, a good way of making easy money is to buy a house with a big garden and build a bunch of houses on it.

One of the motives to do this is to take advantage of the tax breaks householders enjoy compared with professional developers.

Everybody knows, for example, that selling all or part of your main home is exempt from capital gains tax (CGT); that tax loophole was one of the motors that drove the property boom. So if you build a house in the back garden, and sell your current house and move in to the new one, it will become your main residence and you won't pay tax. Makes sense, doesn't it?

And if you manage to split your single original property worth £300,000, for example, into two properties worth £240,000 each, you won't have to pay any stamp duty either, will you?

Often it is not as simple as that, according to chartered tax advisor Lakshmi Narain. "It is true that if you get planning permission and dispose of the garden with its development value, there will not be any tax because it is your main residence," he says. "But there are anti-avoidance provisions, so if you acquired the land with the specific intention of developing, it may be seen as a trading transaction and liable to CGT."

Of course, the Revenue and Customs are unlikely to be able to tell what your intentions are when you buy a house with a large garden, unless they have inspectors with mind-reading skills. If you are a professional builder with a long history of doing places up for resale, however, they may be suspicious and any attempt to deceive the Revenue can result in imprisonment.

The other possible snag is that very large gardens don't count, Narain says.

"The legislation specifies up to half a hectare (about 1.23 acres) as a garden suitable for the proper enjoyment of a house, but if you have a very large house, more may be appropriate," he says. The result is that selling a small corner of your extensive grounds for development will attract CGT even though it might be part of your garden.

Another tactic used by some home builders to maximise profit is to sell the old house and move in to the new one, then immediately sell that, too.

Again, Narain says it is the intention that counts. A person who moves in to a house with a large garden, builds a house in the garden as quickly as the planning system will allow and then moves in to it, only to sell up within weeks, will be examined very closely. If the person has no other apparent income, he or she may be regarded as a professional property developer and taxed accordingly. The Revenue may even remove CGT exemptions such as the yearly £8,500 allowance.

Another possible pitfall is on the horizon for people hoping to cash in on their garden. Planning gain is the jargon for amenities a developer has to provide to ensure the community does not suffer. For example, the builder of a big scheme might have to provide a new school or health centre to serve the new residents.

The Government plans to introduce a standard planning gain supplement to pay for these amenities, and it is feared that even individual houses may be caught in the new tax.

"Planning gain supplement is designed to provide funding for local amenities and is intended to come into force in 2008, if it gets cross-party support," Narain says. Meanwhile, householders with big gardens would be advised to get planning permission now.

Obtaining planning permission is not easy either, though happily gardens are officially regarded as brownfield land that a council can use to make its brownfield development statistics look better.

Roy Ilott, a chartered surveyor in Epsom, advises that a frontage onto a road is vital. "The most important thing is access from the road. That is why corner plots are so popular," he says. "But even if you have an existing access you have to check it complies with the local authority's development plan."

The next step is to ensure that the new plot is big enough to support a house. "Check out the council's policy on plot sizes and the distance between houses, which differs from area to area," he says. "Some specify a minimum plot size, so if yours is less, it is no good."

That could be a bind. If the council's minimum plot size is one acre, this implies your original garden is at least two acres. Which means you will attract CGT on the sale. Sometimes you just can't win.