ºÃÉ«ÏÈÉúTV

Brownfield development is central to the push for more housing, but rather than centring on derelict factories and warehouses and so on, increasingly the land is coming from bits of homeowners' gardens.

English tax law makes the transfer of land that forms part of a property a tricky proposition for both parties. If a landowner sells some of their holding, the transaction will almost certainly give rise to a capital gain. But when they sell the house that they live in, they don't have to pay tax on that gain because it qualifies for the principal private residence exemption.

The problem is in defining how far this exemption extends when selling a part of the land surrounding the house. This is a critical point for developers since a landowner will certainly be more happy if they can sell a part of their garden tax free.

The area of land that falls within the tax exemption is an ungenerous half a hectare (approximately 1.25 acres), inclusive of the site of the house. A larger area is permitted if it is required for the "reasonable enjoyment" of the house. What is meant by "reasonable enjoyment"? The law implies that if the house is of sufficient size and character, the principal private residence exemption can be extended to take account of its need for a larger garden.

HM Revenue and Customs has published guidance after a number of court cases where the law was unclear. This guidance says that to qualify for the exemption, the land must be used for the occupation and enjoyment of the resident on the date it is sold.

What is important here is that land cannot be used for agriculture, commercial woodlands or any trade or business. There can be a building on the land provided it is not let or used for business. Do not forget, if a landowner has been using the land for their own business then they are likely to be able to benefit from the ability to pay tax at a rate of only 10% on their capital gain. This is a favourable option and one that may well help smooth negotiations.

Understanding the issues faced by the seller can offer developers an insight into the negotiating stance a particular seller might be taking

A particularly important rule is the one that says land fenced off from the home or residence at the date of sale will not qualify for the exemption.

Problems may also arise if the plot is developed prior to the sale, as HMRC could deem the development work to be a trading activity. Any profit on that work could then be taxed as income and National Insurance might also be payable. In these circumstances the risk for the seller is that the generous capital gains tax exemption is not available or is limited, thus increasing or creating an unwelcome tax bill.

It is sometimes necessary to encourage a seller to trade off participation in the future development profit - many deals have a joint venture arrangement within them. This kind of participation would be likely to be deemed as development hence potentially falling into the sphere of an income taxable transaction, thereby limiting or removing the tax exemptions. Thus a deal that is certainly tax exempt might be more attractive than one where the headline price is higher but a greater proportion is taxable.

The district valuer is the arbiter over whether an area larger than half a hectare will be permitted to qualify for relief. A challenge can be made by the seller if the position cannot be agreed. The district valuer is unlikely to investigate until some weeks or even months later so photographic and other similar evidence will need to be retained by the seller to support any argument.

So, whether you are the buyer or the seller it is essential to have a full understanding of the tax implications for the seller.