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 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 the courts will refer to what is termed the 'Badges of Trade'.
These 'Badges' are summarised in HMRC guidance Business Income Manual Section 20205 as follows:
1. Profit-seeking motive.
2. The number of transactions.
3. The nature of the asset.
4. Existence of similar transactions.
5. Changes to the asset.
6. The way the sale was carried out.
7. The source of finance.
8. Interval of time between purchase and sale.
9. Method of acquisition.
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 has nothing to do with their trade HMRC could try to argue that the purchase of land and subsequent sale is a trading transaction.
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.
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