Will selling off a piece of our garden land us with a tax bill?

Since 2009, we have been living in a bungalow on 0.37 acres. We decided to sell a portion of the garden measuring 0.1 of an acre and recently obtained full planning permission for a dormer bungalow on the 0.1-acre site.

The question we have is whether we need to pay the 33% capital gains tax on the sale of this portion of our garden? We are both in our 60s and are selling this in order to clear the remainder of our mortgage, which is €50,000 approximately.

Ms GC

Selling off a site is an increasingly common feature of life, especially in urban areas, where there is strong demand for infill sites. Plot sizes in many older established areas of housing are much larger than you would see with newer estates, often with relatively large gardens.

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And, as long as it does not intrude too much on your privacy, selling the site to pay down the mortgage makes a lot of sense, especially as you approach an age where your earning capacity is reducing.

But you are right to consider whether it might have tax implications for you.

Capital gains tax (CGT) applies in general on the gap between the price at which you buy an asset – such as a holiday home or investment property or a work of art – and the price at which you either sell it or give it away.

However, there is an exemption for what the Revenue Commissioners calls your principal private residence: your family home. The exemption covers the building and any associated garden, as long as the overall site is no larger than one acre.

Some people think that this gives them free rein to sell off a site without any tax implication. However, there is a limit to the CGT exemption, and that arises where you are selling off the family home not as a residence for another family but for its development potential.

In this case, the Revenue requires you to calculate what the value of the property would be as a residence and compare that with its development value. So, if you have a home valued at €400,000 but sell it for its development potential at €600,000, Revenue will give you relief for the €400,000 but require you to pay capital gains tax against the balance of €200,000.

To work out your liability, you take the €75,000 sale figure for the site and divide it by the value of both sites

Much the same will apply in your case. The difference is that you are still living in the original home on part of the original site, so there is an element of pro-rata in working out the liability.

Revenue does set down an example of what happens where part of an asset is disposed of. You do not give a valuation for your home or what you originally paid for it, but let’s assume it was originally bought for €300,000. The site you are selling is over a quarter of the original site in size, but obviously its value needs to take into account the fact that the home remains with you in situ on the balance of the site.

Once you sell the site with the planning permission, you will have clarity on its value. You then need to get a professional valuation done for the site and house you are retaining.

Let’s say, for argument’s sake, that the site you are selling is worth €75,000 with the planning permission, and that the valuer says your home on its reduced site is worth €400,000.

To work out your liability, you take the €75,000 sale figure for the site and divide it by the value of both sites. You then multiply the original cost of the property by this fraction. So, in this case, it would be 300,000 x 75,000 / (400,000 + 75,000) = X. And the X in this case is €47,368.

That €47,368 is the development value allocated to that part of the original site you are selling. Before assessing capital gain tax, you are allowed to deduct from that gain costs incurred in its sale – the actual sale, not the securing of planning permission.

That would cover things like legal and estate agency services. Let’s say these are €5,000 (because I like round numbers), reducing your gain to €42,368.

That would leave you with a tax bill of between €13,143 and €13,562, because you are entitled to relief on the first €1,270 of capital gains in any year and, if your home is in both your names, each of you would be entitled to that relief.

So, in our hypothetical situation, if you sold this site next to your home for €75,000, you would have around €56,500-€57,000 in hand, allowing you to pay down your mortgage.

There is an exception to this rule, and it applies when you are giving the land away to a child of yours, a definition that includes stepchildren, a civil partner’s children or even foster children in certain circumstances. It’s not the scenario you are looking at, but it is worth mentioning for the benefit of others who might be reading this.

The exemption covers the building and any associated garden, as long as the overall site is no larger than one acre

In that case, you will be exempt from capital gains on any site no more than one acre in size and at or below €500,000 in value as long as they use it to build a family home. They could not use it to construct an investment property, for instance, or a holiday home for themselves when they return home to visit.

If people do hand over a site to a child in good faith, accessing the exemption from capital gains, and the child does not ultimately build a home on the land or does not occupy it as their family home for at least three years, they could leave themselves open to a clawback by Revenue. Essentially, they could get landed with the capital gains tax bill that you sidestepped by gifting them the site.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice