Land And Property – Going On An Adventure?
By Mark McLaughlin
Mark McLaughlin points out that determining whether a land or property transaction is trading may not be straightforward.
The UK’s tax legislation is very often unclear when it comes to the treatment of certain events or transactions. For example, a potential ‘grey area’ is the tax treatment where an individual disposes of land or property; does the transaction fall within the income tax or capital gains tax (CGT) rules? This uncertainty over income or capital treatment has resulted in a number of cases over the years.
The difference between income tax rates (20%, 40% and 45%) and CGT rates (10% and 20%, or 18% and 28% on gains from the disposal of residential property interests that do not qualify for private residence relief, and also gains arising in respect of carried interest) for individuals (in 2016/17) means that taxpayers will generally seek capital treatment in respect of their property disposals.
Change of direction
Interestingly, in Stayton v Revenue and Customs  UKFTT 345 (TC), the taxpayer argued (unsuccessfully) that the disposal of a property was an ‘adventure in the nature of a trade’, after previously treating it as a capital transaction.
The taxpayer purchased a residential property in June 2005, and initially intended to move into it as her residence. The property was substantially redeveloped, before being sold at a gain in May 2007. The taxpayer did not notify HM Revenue and Customs (HMRC) of chargeability on disposal of the property. When filing her tax return for 2007/08, the taxpayer reported a capital gain. HMRC subsequently increased the tax liability after re-computing the gain.
The First-tier Tribunal found that the taxpayer had no intention of developing the property as an adventure in the nature of a trade. Furthermore, there was no ‘supervening trading’ (i.e. no adventure in the nature of a trade when the taxpayer’s original intention to move into the property as her residence changed in January 2006, after deciding against the move). The tribunal agreed with HMRC that the property was held as a capital asset, and was therefore subject to CGT on disposal.
Trade or ‘adventure’?
It might seem strange that the taxpayer changed her position from CGT treatment on the disposal of the property, in view of the potentially higher rates of income tax. However, the tribunal observed that this change occurred after the taxpayer realised that loan interest was not an allowable deduction in her CGT computation.
Note that the taxpayer did not argue that she was engaged in a property trade; she instead contended that the property was held as an ‘adventure in the nature of a trade’. 'Trade' is defined as including ‘any venture in the nature of trade’ (ITA 2007, s 989; CTA 2010, s 1119). The term 'adventure in the nature of trade' dates back at least to the Income Tax Act 1853. The term 'adventure' was changed to 'venture' when the tax legislation was modernised, but was intended to have exactly the same meaning.
Even if a property transaction does not constitute a trade (or venture in the nature of a trade), that does not necessarily mean that it will be subject to the CGT rules.
Anti-avoidance provisions concerning transactions in land can result in income tax treatment in some cases. Long standing rules (in ITA 2007, Pt 13, Ch 3) were replaced in Finance Bill 2016 by extended provisions (new ITA 2007, Pt 9A, for income tax purposes), which broadly treat affected profits or gains (including gains of a capital nature) on disposals of UK land from 5 July 2016 as the profits of a trade for income tax purposes if certain conditions are satisfied, subject to only limited exemptions (including exempt private residences for CGT purposes). Specialist advice is recommended in cases of doubt.
The tribunal in Stayton provided a useful summary of principles derived from case law on the question of whether or not a transaction is an adventure in the nature of a trade, including the ‘badges of trade’ (as set out in Marson v Morton  STC 463). This summary may be helpful in similar cases.