The First-tier Tribunal (FTT) recently considered whether money from property sales was trading income or capital gains, and if private residence relief was due. The FTT ruling provides useful guidance on both issues. What’s the full story?
Mr Campbell bought and sold four properties in little over five years. He made a substantial profit from the transactions which he declared as capital gains. He claimed private residence relief (PRR) against each gain, meaning that in his view there was no tax to pay. HMRC disputed that the profits were capital gains, arguing instead that Campbell was trading as a property developer and so any profits were liable to income tax to which, of course, PRR cannot apply. HMRC also argued that even if the profits were capital gains PRR wasn’t due as Campbell hadn’t lived in the properties.
Trading or not?
For HMRC to succeed at the First-tier Tribunal (FTT) it had to show that one or more of the generally accepted tests established by case law, known as the “badges of trade”, applied to Campbell’s buying and selling of properties. While some of these applied, e.g. there were multiple transactions and Campbell had spent money improving the properties to varying degrees, the FTT decided that on balance the money made by Campbell was not trading income.
In arriving at this decision, the FTT took account of the fact that Campbell was employed full time in work not related to property development and had not been engaged in such activities elsewhere.
While the existence of one badge of trade can be enough to confirm an activity as trading it doesn’t automatically do so despite HMRC’s assertion. As in this case it’s possible for more than one badge of trade to apply without an activity counting as trading.
HMRC failed to show that buying, improving and selling properties for a profit was trading. The FTT said the tests for trading activity were not met. However, HMRC won its argument that private residence relief didn’t apply. The taxpayer’s argument that he didn’t live in the properties as he was in job-related accommodation wasn’t believable.
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