Mark McLaughlin warns that a business’s activities need to be sufficient to amount to a ‘trade’ for business asset disposal relief purposes.
Business asset disposal relief (BADR) usefully offers a capital gains tax (CGT) rate of 10% on lifetime gains of up to £1m, where certain conditions are satisfied.
Jumping the BADR hurdles
However, the BADR relief conditions can be difficult. A detailed analysis of the rules is beyond the scope of this article. However, in very broad terms, BADR is available in respect of (among other things) a material disposal of a company’s shares where for a minimum of two years to disposal:
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the company is the individual’s ‘personal company’;
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the individual is an officer or employee of the company (or of a company within the same group); and
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the company is a trading company (or the holding company of a trading group).
Unfortunately, there is little guidance on the meaning of ‘trade’ or ‘trading company’ in the tax legislation. This has resulted in extensive case law. The ‘badges of trade’ can also be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955. Subsequently, in Marson v Morton Ch D 1986, 59 TC 381, nine badges were identified; see HM Revenue and Customs (HMRC) guidance in its Business Income Manual at BIM20205.
A change of plan
The intentions of a business may change over time from investment to trading. For example, in Stolkin & Ors v Revenue and Customs [2024] UKFTT 160 (TC), the taxpayers were shareholders in a company (SGL). In 2011, SGL acquired land in London, which was then shown in SGL’s accounts as a fixed asset capital investment. In November 2013, SGL submitted a planning application for the development of up to 593 dwellings. In December 2013, the site was appropriated to trading stock by SGL. In January 2016, the site was sold to a third party. SGL went into members’ voluntary liquidation in March 2016. The taxpayers disposed of their shares in SGL when they received distributions in respect of their shares in SGL up until 5 April 2016. Each of the taxpayers claimed entrepreneurs’ relief (ER) (now BADR) on disposal of the SGL shares in their tax returns for 2015/16. The taxpayers appealed when HMRC denied ER on the disposal of their shares. HMRC argued that SGL was never a trading company.
The First-tier Tribunal (FTT) considered what constitutes a ‘trade’ or ‘trading’, including the badges of trade, and case law including Marson v Morton. The FTT noted that the site had been a fixed capital asset of SGL but accepted that the site could change its status if SGL carried on (or started to carry on) a trade and the site became trading stock instead. Standing back and looking at the whole picture, the FTT indicated that for the site’s status to be accepted as having changed from a fixed asset to trading stock prior to sale, something more was required than taking steps to enhance its value prior to sale. The FTT considered that this was all SGL did; nor was SGL preparing to carry on a trade.
Practical tip
A change of intention towards trading is insufficient to give rise to a trade. Clear and positive action will normally be needed to demonstrate that a trade was being carried on.
