{"id":622,"date":"2016-03-31T07:14:34","date_gmt":"2016-03-31T07:14:34","guid":{"rendered":"http:\/\/renovateme.co.uk\/blog\/?p=622"},"modified":"2018-09-07T19:27:40","modified_gmt":"2018-09-07T19:27:40","slug":"property-tax-will-profits-subject-income-capital-gains-tax","status":"publish","type":"post","link":"https:\/\/renovateme.co.uk\/blog\/property-tax-will-profits-subject-income-capital-gains-tax\/","title":{"rendered":"Property Tax: Will your profits be subject to income or capital gains tax?"},"content":{"rendered":"

\"capital<\/a><\/p>\n

On the disposal of a property it is likely that a profit or loss will arise. This profit or loss will be taxable as income or capital dependent on whether the activities are trading or investment activities i.e. are you a property developer or a property investor? \u00a0This will directly impact upon the availability to offset losses, claiming of relevant tax deductions as well as the rates of tax applicable.<\/p>\n

Broadly, if the activities constitute a trade then the profits or losses are subject to income tax, however, if the activities are of an investment nature then the capital gains rules will apply.<\/p>\n

How to determine whether the property should be treated as a trade or investment?<\/strong><\/p>\n

The tax legislation is not clear when providing a definition of a trade and it has been the courts that have provided additional guidance on this. The six \u201cbadges of trade\u201d below are used to guide the courts when determining the line between trading and investment activities.<\/p>\n

    \n
  1. The subject matter of the transaction;<\/li>\n
  2. The length of period of ownership;<\/li>\n
  3. The frequency or number of similar transactions;<\/li>\n
  4. Supplementary work on assets sold;<\/li>\n
  5. Reasons for the sale; and<\/li>\n
  6. Motive when acquiring the assets<\/li>\n<\/ol>\n

    Case law has indicated that the most important factor tends to be the motive and intention of the taxpayer at the time of the acquisition of the property. It is worth noting that an intention to dispose of property at a profit at some time in the future does not automatically mean there is an intention to trade and it is important that all factors are considered together.<\/p>\n

    Income tax anti-avoidance provisions<\/strong><\/p>\n

    Even if the profits are not characterised as trading profits, there are specific income tax anti-avoidance provisions which can potentially re-categorise capital gains as income for tax purposes (however there would not be any corresponding national insurance liability should these provisions apply).<\/p>\n

    HMRC can apply these anti-avoidance provisions where any of the following conditions are met:<\/p>\n