When will an investment change to a trade?

In a recent decision the First-Tier Tax Tribunal (“FTT”) set a high bar for companies who wish to convert from having an investment activity to having a trading activity in the context of a property owning company.   

The status of a company as investing or trading can be important for various elements of the tax code.  In particular there are many tax reliefs which require a company to be trading in order for the relief to be available.  In Stolkin v HMRC [2024] UKFTT 160 (TC) the FTT held that shareholders were not eligible to claim entrepreneurs’ relief (now business asset disposal relief) on the disposal of their shares in Stolkin Greenford Limited (“SGL”) as the company was not trading.  

SGL had acquired land as an investment and later appropriated it to trading stock. The FTT took a multi factorial approach in determining whether a trade was being carried on.  This included looking at certain ‘badges of trade’ which the FTT noted were a starting point to be applied to a trading analysis before stepping back and considering the whole picture.

Ultimately, the FTT considered that SGL’s actions taken on the whole did not warrant the change of status of the company from investment to trading.  

The FTT’s analysis

The FTT considered various factors in reaching their decision. We have summarised below some of the key factors highlighted by the FTT: 

1. The period of ownership – In general, a shorter holding period is more associated with trading than investment.  The property had been held for an overall period of five years and as trading stock, following its appropriation, for two years.  The FTT noted that a holding period of five years in the context of a real estate asset did not strongly point one way or the other and although a holding period of two years may be more likely to suggest trading, the simple decision to appropriate to trading stock was insufficient to convert the nature of the asset and therefore the length of the holding period after that decision would not carry much weight.   
2. The subject matter and number of assets – Although these can be relevant factors in considering the badges of trade the tribunal confirmed that in the context of valuable real estate assets these factors were not determinative. Equally the carrying out of intermediate maintenance work on the asset did not have a significant impact on the trading status or otherwise.
3. Economic and physical work on the site – The FTT suggests that in order for work done on land to affect the classification of the owner of the land as trading or investing, the work would need to be substantial and (it appears) it would need to directly link to any subsequent increase in value on sale.  In the present case although work was done to obtain planning permission, which did affect the value of the land, the tribunal considered that it was the decision of the planning authorities to change the status of the land (at their own behest and without the involvement of SGL) that resulted in the biggest increase in value. It was relevant that SGL did not initiate or lobby for the change of approach in relation to the land. The tribunal did, however, reject HMRC’s assertion that work carried out by third parties, e.g. planning consultants, at the request of SGL should be disregarded.
4. Activities of related party – The tribunal did not consider that an acquisition of a separate trading asset by a related company, which was purported to be linked to SGL’s decision to trade, would itself change the status of an existing capital asset, even if the acquisition did impact the potential of SGL’s site.  The trading status of a company needs to be considered by looking at that company on its own.
5. Motivation – A desire to make a profit is an important part of being a trader and does need to be present for there to be a trade. However, simply wishing to make a profit does not mean that a trade is being carried on, it is important to look at how the person is intending to make a profit. The profit making intention must be present alongside all the other characteristics of a trade. The tribunal did not regard the ‘purported appropriation’ as significant in determining whether SGL was carrying on a trade.
6. Intention: The intention as to resale at the time of acquisition was considered by the FTT to be a very important factor where an asset is acquired with an investment intention and the owner later states that their plans have changed and they intend to sell it. The tribunal noted that a person who purchases land with the intention of ‘flipping’ it as soon as possible after some work has been done or planning permission obtained, would undoubtedly be a trader.  The court said that merely trying to enhance the value of land acquired as a capital asset before its disposal is not sufficient to amount to a trade. In the present case, at the time of acquisition the land was treated as a fixed permanent asset by SGL; they had some redevelopment in mind but the overall intention was to retain the land for an income.

The court concluded the analysis by saying that to escape the ‘fetters of the past’ (i.e. the classification as an investment) SGL would have to do something more decisive than simply decide to sell and take some steps to enhance the value prior to the sale. The FTT acknowledged that this meant it would be harder for a person who acquires an investment asset to subsequently be carrying on a trade than where a trading intention had existed from the outset.  

Why is it important that the company was trading?

The ‘trading’ or ‘investing’ categorisation of a company can have significant tax implications in many areas of the tax code but particularly in the context of tax reliefs and tax advantaged arrangements. Individuals holding shares in trading companies (or holding companies of trading groups) may benefit from certain reliefs or tax advantaged schemes which reduce their tax liability, such as business asset disposal relief, business property relief, investors’ relief and venture capital schemes such as EIS and SEIS to name but a few. For corporate shareholders trading status is critical for the application of the substantial shareholding exemption which provides a relief from corporate tax on chargeable gains. 

Co-authored with Roslyn Jackson-Stroud , Solicitor, Burges Salmon

the First-Tier Tax Tribunal (“FTT”) set a high bar for companies who wish to convert from having an investment activity to having a trading activity