14 February

Tax Tips For Landlords - Trader Or Investor?

              Tax Tips For Landlords - Trader Or Investor?

Anyone buying property to let out on a long-term basis will most likely be deemed an investor, whereas someone buying to refurbish then sell, whether resulting in growth or not, may be deemed to be trading or dealing in properties and be taxed according:

The two factors to consider are intention (the reason for the purchase) and whether the transaction has the characteristics of being a trade. If it can be shown that the property h purchased for its income, then the fact that it was sold as a result of getting an offer shortly afterward need not convert the transaction into one of being a trade deciding whether the transaction is a trade, HMRC will refer to what is termed ‘Badges of Trade’, using the same headings when determining whether a business I as a ‘trade’.

The benefit of being deemed an investment activity is lower tax rates, however, there are various reasons why it may be beneficial for the activity to be determined as For example, pension contributions are possible, as such contributions require earnings and also the use of losses is more varied. In addition, the outright sale of a business (rather than individual assets) would usually be eligible for an entrepreneur (see Tip 57) where the gain is taxed at 10% on the first £10 million of eligible gain made lifetime rather than the investment tax charge of 20% if a higher rate taxpayer.

A particular problem may arise for those engaged in the property business way (e.g. a builder, surveyor, or estate agent). Even though the purchase itself has nothing to do with their trade, HMRC could try to argue that the upland and subsequent sale is a trading transaction.

Trader or Investor?

In the case of Kirkby v Hughes (1992), Mr. Kirkby was a builder who also develops the property. He bought a property, carried out improvements, lived in it for a while, and then tried to claim that the property was his main residence and as such exempt from capital HMRC and the tribunal disagreed and found that he was trading. It was held that because already a builder, he had to go further and prove that he was occupying the property main residence to be exempt from tax. The burden of proof was greater for him than the other taxpayers.

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