Are you trading?

Determining whether or not you are trading is not always straightforward. The courts have developed a number of considerations to establish whether trading exists, known as the ‘badges of trade’. These include:

• the frequency and number of similar transactions;
• the length of ownership;
• modifications to the property; and
• the reason for the acquisition (and, potentially, subsequent changes of intention) .

Your intention when you purchase a property is one of the most important considerations. If, for example, you purchase the property with the intention of improving it to sell on quickly at a profit, you are very likely to be trading as a property developer.

What is the tax effect?

If a property is developed and sold as part of a ‘trade’, any profit on disposal will be subject to income tax at rates of up to 45 per cent plus national insurance.

However, if you buy a property to retain as a long term investment and rent it out, any gain on the sale should be subject to CGT at rate of up to 28%.

Living in the property

If you are living in a property whilst repair work is undertaken and you then sell the property, you may be able to reduce or extinguish any gain subject to CGT through a claim for Principal Private Residence relief (MRR), but even though you live there, it may not be available. See article Principal Private Residence relief.

If, based on the facts, you are considered to be trading, your profits are subject to income tax. This means that you cannot claim Principle Private Residence relitf for your occupation of the property, as this relief is only available for a capital gain, not income profit.

Furthermore, even if you are not trading and any gain is therefore subject to CGT, a claim for Principal Private Residence relief would not be accepted where a property is acquired at least partly for the purpose of realising a gain from its disposal.