In Rebecca Stayton v HMRC [2016] UKFTT 0345 (TC), the First Tier Tribunal (FTT) was asked to consider this question as part of Rebecca Stayton's (RS) appeal against HMRC’s decision to recalculate her capital gain on the sale of her property.
RS and her husband acquired the property in 2004, with the initial intention for RS to live there as her residence. After renovating the property and following a boundary dispute with their neighbours, they later sold the property in 2007. RS did not notify HMRC of her capital gain on selling the property.
After enquiries from HMRC, a closure notice was sent to RS in 2013, substantially increasing her capital gain. HMRC disagreed with RS' assessment that she was trading as a property developer when she made the sale and that the capital gain ought to be considered trading profit. RS appealed to the FTT against their decision.
In determining RS’ appeal, the FTT applied the nine ‘badges of trade’ previously set out in the case of Marson v Morton [1986] STC 463. The most fiercely contested issue related to RS' intention and, in particular:
- whether or not RS had to have an intention to trade for there to be ‘an adventure in the nature of a trade’ for income tax purposes
- whether RS had to have such an intention at the time she acquired the property.
In response to the first question, the FTT determined that intention was not a prerequisite for establishing whether the property was held as part of a trade. However, in the absence of such an intention, the other badges would need to be established and the lack of a trading motive could be a 'tie-breaker’ where the position was finely balanced.
Turning to the second question, the FTT found that intention would normally be expected on acquisition of the property, but it was possible for intentions to change where there was "supervening trading". However, this would be unusual, unless the taxpayer had a pre-existing business in trading land which later included the relevant property.
In reaching their decision, the FTT found on the facts that at no point had RS intended to develop the property as part of a trade. Applying the ‘badges of trade' test and looking at the 'whole picture', the FTT found that the property was acquired as a residence and RS had acted in the manner of an owner rather than someone operating in the business.
The FTT therefore upheld HMRC’s decision to recalculate RS’s capital gain on the basis that it was held as a capital asset rather than as an adventure in the nature of a trade. RS’ appeal was dismissed.
This is an unusual case in which the taxpayer sought to argue that the sale of her property was trading income rather than capital as in most cases. The FTT’s decision serves as a helpful reminder of the distinction between the two and the difference between properties genuinely sold as part of a trade and residential or other properties.