• Are you trading or investing?
• Is your property held as trading stock or investments?
• What are the consequences of changing from one to the other?

HM Revenue and Customs (HMRC) acknowledge that property transactions, more than most are capable of being either trading or investment activity. Unfortunately there is no easy guidance for the land holding company or individual to determine which camp they fall into. HMRC say “A trading transaction is a deal rather than an investment” and go on to give some guidance on what factors they will take into account when trying to distinguish the trading status of a property business.

Factors that HMRC will take into account will include:

• whether there has been any previous transactions and if so at what intervals
• whether the way in which the transaction was organised was typical of a land dealer
• whether a loan was necessary to fund the purchase and if so under what terms
• the character of the land, was it suitable for long-term investment or ripe for immediate development?
• the length of time that the land was held, and particularly, whether there might have been a prearranged sale.

The distinction between trading and investment activity is a question of fact and each case will stand or falls on its own merits. Significant emphasis is applied to the intention of the individual at the moment of the acquisition of the land and it is therefore important to retain evidence to prove what your intentions are.

It is also important to understand that where circumstances and intentions change, property held as trading stock can change to investment and vice versa. This can cause significant cash flow problems as a tax point will arise when there is no sale and hence no cash to pay the tax due.

Circumstances where a change takes place might include say a property developer who develops a property for sale but then decides to use it themselves, or conversely someone owning some land as an investment decides to start developing the land. In each case a deemed disposal at market value will take place giving rise to either a trading profit where the movement is from trading stock to investment or a capital gain where the movement is from investment to trading stock.

Again it is the facts that will decide the matter and evidence should be retained to support the facts. Property developments can be held for significant periods of time without changing their nature to investment provided there remains an intention to sell. Likewise significant amounts of development can take place on investment land without it being treated as a trade. HMRC make the following observations:

• Development of infrastructure alone (for example, the division of land into plots, the construction of access roads, the installation of mains services) is not sufficient to demonstrate the appropriation of land, previously acquired as a capital asset, to stock in trade and does not automatically allow us to argue supervening trading. Such development merely enhances the value of the capital asset in the owners chosen market place – that of the developer/purchaser.

• The obtaining of planning permission prior to sale does not, in itself, define a transaction as a trading transaction. It may however provide evidence of intention and thus add weight, in certain circumstances, to a trading argument.

There is less guidance available in circumstances where trading stock is used for non-trading purposes, but in a recent inheritance tax case Piercy v R & C Commissioners it was held that a property developer letting out developed property which he was unable to sell did not necessarily mean that the trading motive had changed.

If you are unsure of the status of your business or have any concerns regarding the above matters then please contact us and ask to speak to a member of our property team.