Tax Tips For Landlords – 4. 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 a gain or not, may be deemed to be trading or dealing in properties and be taxed accordingly.
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 has been purchased for its income, then the fact that it was sold as a result of getting a good offer shortly afterwards need not convert the transaction into one of being a trade. In deciding whether the transaction is a trade, HMRC will refer to what are termed the ‘Badges of Trade’, using the same headings when determining whether a business is working 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 a trade. For example, pension contributions are possible, as such contributions require relevant earnings and also the use of losses is more varied. In addition, the outright sale of a trading business (rather than individual assets) would usually be eligible for entrepreneurs’ relief (see Tip 57) where the gain is taxed at 10% on the first £10 million of eligible gain made in one’s 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 in some way (e.g. a builder, surveyor or estate agent). Even though the purchase itself may have nothing to do with their trade, HMRC could try to argue that the purchase of land 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 developed property. He bought a property, carried out improvements, lived in it for a while and then sold it. He tried to claim that the property was his main residence and as such exempt from capital gains tax. HMRC and the tribunal disagreed and found that he was trading. It was held that because he was already a builder, he had to go further and prove that he was occupying the property as his main residence to be exempt from tax. The burden of proof was greater for him than for other taxpayers.