- Churchill Tax
Is Frequently Moving Homes A Business?
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?
Serial property sales
Mr Campbell (C) 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 C 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 C 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 C’s buying and selling of properties. While some of these applied, e.g. there were multiple transactions and C had spent money improving the properties to varying degrees, the FTT decided that on balance the money made by C wasn’t trading income.
Mitigating factors
In arriving at this decision it took account of the fact that C was employed full time in work not related to property development and had not been engaged in such activities elsewhere. We’re not so sure the FTT’s decision was right. However, it is a reminder that where there’s doubt tribunals will usually come down in favour of the taxpayer.
TIP:
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.
Private residence relief
Having dodged the “trading” bullet C’s claim for PRR was now in the line of fire. Here his luck ran out. C had argued that although he had not lived in the properties PRR applied because it was his intention to but he was prevented because he lived in job-related accommodation. This is one of the exceptions that allows PRR for periods of absence from your home but the FTT decided the alleged job-related accommodation was actually C’s home. Several factors indicated this, not least was that in his evidence C referred to the accommodation as his home. The property was his parents’ home and C lived there not because of his work but to look after his father with dementia.
TRAP:
It’s worth noting that had C’s claim for PRR not failed for the reasons we’ve explained, HMRC had a further argument in reserve. Legislation specifically precludes PRR for gains made from properties specifically purchased for the purpose of making a gain. If this argument had been needed we think it would have had a better than 50/50 chance of succeeding.
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.