Property investment or trading?

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Property investment or trading?
  • Outline
  • Case law
  • Why it matters

Outline

The distinction between dealing or development and investing in property is crucial to a great many areas of tax law. 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 dealer or property developer. However, where does one draw the line between activity regarded as dealing and activity looked upon as investment?

First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’.

The badges of trade are not a statutory concept, but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of other activities.

It is not necessary for a transaction to have all of the badges in order to be regarded as dealing or developing and clearly some badges will carry greater weight than others, depending on the facts of the case. Indeed, 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.

A summary of the badges of trade is given in the Badges of trade guidance note.

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

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