When is selling land or buildings “trading”?

October 8th 2021

The First-tier Tribunal recently ruled on whether profit made from the sale of land bought as part of a residential property was taxable as trading income or capital gains. What was the outcome and why?  Brona MacDougall looks at this in more detail.

The dispute
The case of Heather Whyte v HMRC followed a long investigation by HMRC. It ended when it closed the enquiry without agreement and amended Whyte’s (W’s) tax returns to show income she received from the sale of land as trade profits rather than gains. W appealed to the First-tier Tribunal (FTT) to overturn HMRC’s amendments.

W completed the purchase of a house in July 2001, which included approximately eleven acres of land. She and her family moved into the property soon after. W’s husband is a builder and property developer but the purchase was made in her name. Planning permission for six building plots on the land with the house was applied for within two months of the purchase and granted in 2003. Over a period of three years the plots were sold by W to her husband who built houses on them for sale. There was little evidence of the transfers which proved a significant factor in the FTT’s ruling.

Trading income or capital gains
Generally, profits made from the sale of land and buildings are taxable under the capital gains tax (CGT) rules. In most circumstances this results in a lower tax bill compared with profits charged to income tax. This was the motive behind W’s appeal. In essence she argued that she bought the land and sold the plots at a profit (gain) to her husband who then constructed houses on them. Thus, any profit from their construction and sale was his alone.

Questionable evidence
On the face of it W’s argument seemed reasonable. The trouble was the evidence she provided to support her case was tenuous, in particular the alleged transfer of the plots. The FTT was blunt in its criticism and said it did not believe W’s evidence. It found that W was involved in the development of the building plots from the start. The level of involvement meant that the “badges of trade” were present. In support of this view the FTT pointed to the fact that land forming the plots had been modified, e.g. the addition of an access road and the installation of utility services, to make them saleable for greater profit. It was not as simple as buying the land and seeing an opportunity to sell part of it for a gain that would have been subject to CGT.

Effect of the judgment
While the land started life as a capital asset, when W began work to improve the plots’ values, they became trading stock. The increase in value up to this point was liable to CGT but the majority of the profit arose after the land was “appropriated to trading stock” and that was income from trading (property development) and liable to income tax.

Be aware that the simple buying and selling of land or buildings for gain is liable to CGT, but taking steps to improve its value may attract HMRC’s attention. If the badges of trade are present it will argue that the “profit” is taxable as income.

The taxpayer took active steps to increase the value of the land and was then involved in developing the resulting building plots. The increase in value of the land up to the point she took steps was taxable as a capital gain but thereafter the plots of land became trading stock and profits from their sale was liable to income tax.


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