Mark McLaughlin looks at a case where HMRC unsuccessfully argued that the sale of a residence was part of a property development trade.
When an individual sells a dwelling where they have lived, it is generally expected that capital gains tax (CGT) principal private residence (PPR) relief will exempt all or part of any gain arising. In most cases, this will be correct.
However, HM Revenue and Customs (HMRC) sometimes seeks to argue that the seller is a property trader. If HMRC is successful, the individual will be subject to income tax on the ‘profit’ from selling the dwelling. An income tax charge takes precedence over a CGT charge, so no PPR relief will be available. The profit will be taxable at income tax rates of 20%, 40% or 45%, and a Class 4 National Insurance contributions liability may also arise thereon. But how might HMRC go about establishing the existence of a trade?
Is there a trade?
The ‘badges of trade’ are generally instructive. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade.
Subsequently, in Marson v Morton Ch D 1986, 59 TC 381, nine ‘badges’ were identified. HMRC guidance (in its Business Income manual, at BIM20205) lists these badges as follows:
- A profit-seeking motive;
- The number of transactions;
- The nature of the asset;
- The existence of similar trading transactions or interests;
- Changes to the asset;
- The way the sale was carried out;
- The source of finance;
- The interval of time between purchase and sale; and
- The method of acquisition.
No single badge is conclusive evidence of a trade; it is important to consider the overall picture. Every case is different.
Not trading
The badges of trade have been considered in numerous cases, including Campbell v Revenue and Customs [2022] UKFTT 46 (TC). In that case, HMRC became aware that the taxpayer bought and sold a total of four properties between 2010 and 2015 and noted that only one property was ever occupied by the taxpayer. HMRC argued that the taxpayer was a property trader.
The First-tier Tribunal (FTT) referred to Marson v Morton and the badges of trade. The FTT held that whilst the taxpayer clearly generated profits from the sale of the properties, and the length of ownership for all but the very first purchase was relatively short, this did not point towards trading.
The properties were modified to be sold, which generated a profit. However, the taxpayer’s activities had no connection with an existing trade. There was no evidence to indicate that the taxpayer had engaged in a similar activity over a protracted period. The FTT accepted that the taxpayer was not a property developer but found that the taxpayer’s activities generated gains, which were subject to CGT. The FTT also found that PPR relief did not apply to any of the properties.
Practical tip
Even if the disposal of a dwelling house is not a trading transaction, the fact that the property was occupied as the owner’s main residence does not necessarily entitle the individual to PPR relief. For example, if the dwelling was acquired wholly or partly for the purpose of realising a gain from its disposal, no relief is due on any gain arising (TCGA 1992, s 224(3)).
