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Capital gains enjoy a much more benign tax regime than income or profits. Firstly, capital gains tax is only 28% for higher rate taxpayers compared to 40% for income tax or even 50% for those in the top bracket and there are no National Insurance contributions to pay. There is also a generous annual allowance for capital gains plus many reliefs and exemptions you can take advantage of. For this reason it is usually better for a transaction to be treated as a capital gain than as a trading profit.

However, it is not always easy to tell the two apart. For example, you may inherit a house and decide to renovate it before selling it on. That would almost certainly be treated as a capital gain. But if you happen to be a property developer it might well be regarded as part of your normal trading activities. And if you buy a large house with the express intention of converting it into flats, there would clearly be a profit motive and it would probably be subject to income tax rather than capital gains tax, even if you only do it once.

Similar considerations apply to smaller items. Chattels worth less than £6,000 are exempt from capital gains tax so usually you don’t need to worry about tax when you sell old furniture at car boot sales. On the other hand, many people make a living out of buying and selling second hand goods, and then it becomes a trade. That is why tax inspectors spend a lot of time looking at websites such as Ebay.

You should note that capital gains may also arise when you dispose of an asset in some other way, such as gifting it or receiving compensation for loss or damage, as in an insurance claim, although this wouldn’t apply to most personal possessions.

To distinguish between trading and capital gains, the Revenue commonly refer to what are known as the Badges of Trade. These are not statutory definitions but certain features and characteristics indicative of trade that have been used and interpreted by the courts over many years and have a substantial body of case law behind them. The main Badges of Trade are as follows:

This is the most fundamental and significant test. If your sole motive for buying an asset is to re-sell it at a profit, without any intention of using it yourself or holding it as an investment, this will be a strong pointer towards trade. The investment motive is very important as it covers the buying and selling of shares and other securities. A private individual regularly engaging in stock market transactions would not normally be regarded as trading due to the investment nature of the assets. This principle was reinforced in Salt v Chamberlain 1979 where the taxpayer entered into around 200 share transactions over a 3 year period but was not held to be trading.

Number of transactions
A single isolated transaction may amount to a trading activity in certain circumstances but generally that is not the case. Usually it is necessary for there to be a series of transactions within a relatively short space of time and for it to be habitual and continuous in order for them to be regarded as trading activity. In Leach v Pogson 1962 a taxpayer was held to have operated a trade on each sale of around 30 driving schools. This included the first driving school to be set up and sold, as it was decided that the intention had been to embark upon the business of establishing and selling driving schools even before he sold the first one.

Nature of asset
An asset is unlikely to be regarded as being held for trading purposes if it would normally be seen as an investment or held for personal use or enjoyment. Shares are a good example of this as they can yield an income from dividends. Works of art and antiques are also normally exempt as they tend to be bought for pride of possession. However, in Rutledge v CIR 1921, the court held that the purchase of one million rolls of toilet paper was “an adventure in the nature of trade because of the nature of asset involved”.

Quantity of asset
Assets bought in large quantities are normally indicative of trade. If a commodity is bought in quantities far in excess of anything which could be used by the individual personally, or his family and friends, and there is little or no income producing or aesthetic potential, a trading motive will almost certainly be present. This was the conclusion reached in CIR v Fraser 1942 when the taxpayer purchased a consignment of whisky in bond. It was decided that this was an adventure in the nature of trade despite the fact that many of the badges of trade were neutral or favourable to the taxpayer.

Existing trade
If the taxpayer has an existing trade, a similarity of this trade to other quite separate transactions may be a strong pointer towards them being trading activities. In Lynch v Edmondson (spC 164) it was held that a self-employed builder, who built 2 flats on a plot of land, was liable to income tax on a premium he received for a 99 year lease on one of the flats. The Special Commissioner decided that the lease constituted a trading transaction, not the disposal of an investment. Builders are always in danger of such an outcome in cases involving property, but it is not impossible for them to rebut the connection with their existing trade. In Harvey v Caulcott 1952 a builder successfully claimed that certain properties he had built and then sold many years later were investments and not part of his trading stock.

If an asset has been modified or adapted somehow prior to sale, or broken down into smaller units, this would usually be a pointer to a trading motive depending on the circumstances. In Cape Brandy Syndicate v CIR 1921, three individuals acquired a quantity of Cape brandy and expertly blended it with French brandy before re-casking it and selling it. It was held that they had a trading motive.

If money has been borrowed in order to purchase an asset prior to selling it, this is a strong pointer towards a trading motive, especially if it is necessary to sell the asset in order to repay the loan. In Wisdom v Chamberlain 1968 a taxpayer was held to be trading in relation to profits made from the purchase and sale of silver bullion. The purchase of the bullion was financed by loans at such a high rate of interest that it was necessary to sell the bullion shortly afterwards to repay the loan.

Length of ownership
Short intervals between purchase and sale are also indicative of trade. In Johnston v Heath 1970, the fact that the taxpayer had contracted to sell the asset before he had even bought it strongly indicated a trading motive. The opposite was true in Taylor v Good 1974. In that case the taxpayer purchased a house with the intention of making it his family home, but unfortunately his wife refused to live in it so he was forced to sell the house shortly afterwards. It was held that his original motive was investment and had not changed to trade, so it could not be taxed as a trading profit.

A trading motive can be discerned from the way in which an asset is sold. In Martin v Lowry 1926 the taxpayer bought the Government’s entire stock of aeroplane linen (some 44 million yards) and set up an organisation to sell it, including a sales office and an advertising campaign. Not surprisingly, it was held to be a trading activity.

If an asset was acquired by inheritance or as a gift and later sold, it would almost certainly be treated as a non-trading activity. If an asset has been purchased the tax treatment will depend upon the motives for acquiring, retaining and selling it. As mentioned above, this could be either an intention to make a profit, a desire to own it or a wish to benefit from it as an investment.

The most important thing to remember is that it will always be the overall picture that counts. The presence or absence of certain features will vary in importance from one case to the next. A badge of trade that may be particularly relevant in one case may be of little importance in another. Each case must be decided on its own merits.

Acumen Tax Solutions
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 3669 5270 Mobile: 07813 582890 E-mail:

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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