News Bulletin – Income Tax Versus Capital Gains Tax

Is it Investment Activity or Trading Activity?

In a recent ruling, the First-Tier Tax Tribunal (FTT) established a rigorous standard for companies seeking to transition from investment to trading activities within property ownership. This distinction between investment and trading holds significant implications across various facets of the tax code. Notably, numerous tax reliefs are contingent upon a company’s trading status. The case of Stolkin v HMRC [2024] UKFTT 160 (TC) underscores this, as the FTT determined that shareholders were ineligible for entrepreneurs’ relief (now business asset disposal relief) upon disposing of shares in Stolkin Greenford Limited (SGL) due to the company’s non-trading status. 

SGL initially acquired land for investment purposes but later reclassified it as trading stock. The FTT’s analysis adopted a multifaceted approach, incorporating the examination of ‘badges of trade’ as a starting point for assessing trading activity before evaluating the broader context. Ultimately, the FTT concluded that SGL’s overall actions did not warrant a change in its status from investment to trading. 

Key factors considered by the FTT in their analysis included the duration of ownership, the nature and quantity of assets, physical work on the site, activities of related parties, motivation, and intention regarding resale. The holding period of the property, although significant, did not decisively indicate trading activity. Additionally, while maintenance work and external interventions like planning permission could influence asset value, they were not sole determinants of trading status. The FTT emphasized the importance of individual company assessment rather than considering related entities or actions in isolation.  

Central to the determination of trading status was the intention at the time of acquisition and subsequent actions. The FTT underscored that mere profit-seeking did not inherently constitute trading activity; rather, it must align with other characteristics of a trade. Notably, the intention regarding resale was pivotal, with an initial investment intention differing from a speculative ‘flipping’ strategy. 

The FTT concluded that transitioning from an investment to a trading company required more than a mere decision to sell; it necessitated decisive actions to enhance value prior to sale. This stance reflects the difficulty in shifting from an investment classification, highlighting a higher threshold for companies initially intended for investment purposes. 

The distinction between trading and investment holds substantial tax implications. Various tax reliefs and advantageous schemes are contingent upon a company’s trading status. For individual shareholders, these reliefs include business asset disposal relief, business property relief, investors’ relief, and venture capital schemes such as EIS and SEIS. Similarly, for corporate shareholders, trading status is critical for the application of the substantial shareholding exemption, providing relief from corporate tax on chargeable gains. 

In essence, the FTT’s ruling underscores the importance of clearly delineating between investment and trading activities for tax purposes. It highlights the nuanced assessment required to ascertain a company’s trading status and emphasizes the significant tax ramifications associated with such classification. 

Tax on Second Homes

Different taxation rules apply to the purchase of second homes in the UK, with the 3% surcharge on SDLT being the main component. There have also been recent moves in different councils to increase the amount of council tax you may pay if you own more than one residential property that you don’t reside in. This article outlines the different financial implications of owning a second home.

The 3 % Surcharge

In simple terms, the 3% SDLT surcharge is a 3% loading on regular stamp duty rates, meaning that you will pay more stamp duty on second homes (or third, or fourth) than if you only own one residential property. This 3% loading charge applies to the entire purchase of the property, and pertains to anyone buying an additional residential property for £40,000 or more, whether that be a holiday home or a buy-to-let. Crucially, even if you only own a share in another property, it will trigger the surcharge if it is worth £40,000 or more.

Though the higher rates of SDLT apply to the purchase of property in England and Northern Ireland (and under separate legislation in Wales and Scotland too) properties that you own or have a share in anywhere in the world are considered.

If the home you are purchasing replaces your main residence, the 3% surcharge does not apply, even if you own additional property/properties at the same time. This means that the property you previously used as your main residence will need to be sold. Under the government guidelines, a main residence denotes where you spend most of your nights, where you’re registered to vote and where you are signed up to local doctors and dentists.

If you keep your main residence and buy another property that you plan to use as your new main residence, you will have to pay the 3% surcharge. However, as long as you sell your original main residence within 36 months of completing on the purchase of your new main residence (and apply in time) you can request a full refund of the 3% stamp duty paid on your new home.

It is important to be aware of the timeline in this scenario, so ensure to seek out expert advice to ensure the application is submitted on time. Recently, the Finance Act 2020 has allowed an extension to the 36-month rule in exceptional circumstances, but this should not be relied upon as each case is considered on its own merits, with Covid-19 no longer a restriction in selling property.

Council Tax on Second Homes

Moving on to council tax. Whilst rises in council tax are going up across the board, a recent change in Chichester District Council sees a 100% premium on empty homes being applied to 3,181 second homes in the area, potentially raising £580,000, under the Levelling-Up and Regeneration Act 2023. It will be interesting to note whether other councils decide to follow their lead to generate more funding for council services.

When deciding to purchase additional properties it is important to take into account firstly the implications for the amount of SDLT you will have to pay, as well as the penalties that apply to taxes such as council tax when owning a property that goes unused for much of the year, such as holiday homes.

For any enquiries as always don’t hesitate to contact us:

Jane Deeks

Managing Director

jane@deeksvat.co.uk

+44 7710 553831