Property Investment versus Trading

Property Investment versus Trading

The distinction between development and investing in property is crucial for tax purposes. Often it will be quite clear-cut as to whether a person is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell will most likely be trading as a property developer. There can, however, be situations where there is a fine line between how the activity is treated.

The tests for whether one is dealing in property or making a property investment are the same as for any other trade. The tests are commonly called “the badges of trade.” It is not necessary for a transaction to have all of the badges in order to be regarded as developing and some badges will carry greater weight than others, depending on the facts of the case. In some cases the existence of one single badge can be enough for the person to be trading. The situation will therefore always need to be considered carefully in light of all the facts and taxpayer's intentions.

In terms of the distinction between property dealing and property investment, normally the main “badges” are the profit seeking motive, the frequency and number of similar transactions and the length of ownership.

There are numerous examples of court cases that involve the taxation of land transactions, so one should be aware that HMRC may pay close attention, particularly given the large sums that are often involved.

Simon Boxall, Tax Director at Ward Williams says:

“One of the main reasons we are concerned with whether a property transaction is development or investment is of course tax. If the sale is made as part of a trade, both income tax and Class 4 National Insurance contributions will be payable on the profit. If the sale is of an investment property, the profit is charged to capital gains tax. This could mean the difference between a charge of up to 47% (the additional rate of income tax plus Class 4 national insurance) on the profit and a charge of 28% (the top rate of capital gains tax). There is also the consideration of whether a transaction should take place through a Limited Company (or SPV – Special Purpose Vehicle) as Corporation Tax rates will be lower than income tax rates.”

Ward Williams has a team that specialises in the needs of landlords. To find out more please visit our Property section

If you wish to discuss the above, please contact Simon Boxall at simon.boxall@wardwilliams.co.uk

About the author

Simon is the Tax Director at Ward Williams and has more than 20 years of practical experience working in the tax profession.

 

Specialising in personal tax, Simon qualified as a Tax Technician in 2007, having been awarded with the Ivison medal for attaining the highest mark in the Personal Taxation paper in 2006.

 

As department head, Simon oversees the tax team across the Ward Williams group, whilst managing a diverse portfolio of clients including high net worth individuals, doctors, directors of owner managed businesses, partnerships and sole traders.

simon.boxall@wardwilliams.co.uk

01895 236335