Mark McLaughlin looks at the trading requirement for capital gains tax business asset disposal relief purposes.
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In most cases, it should be straightforward to establish whether a company is a trading company for capital gains tax business asset disposal relief (BADR) purposes.
It’s trading…isn’t it?
A ‘trading company’ in this context means ‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’. The ‘trading activities’ of a single (non-group) company are defined as including activities carried on by the company ‘in the course of, or for the purposes of, a trade being carried on by it’.
BADR also potentially applies to the disposal of shares in the holding company of a trading group. A ‘holding company’ means a company with one or more 51% subsidiaries. A ‘trading group’ means a group of companies one or more of whose members carry on trading activities and the activities of whose members, taken together, do not include to a substantial extent activities other than trading activities.
‘Trading activities’ includes activities carried on by a member of the group ‘in the course of, or for the purposes of, a trade carried on by any member of the group’ (TCGA 1992, s 165A).
Trading income or income from property?
An area of difficulty can be in establishing the trading status of a company with a principal activity which generates income for occupying land or property.
For example, in Moffat v Revenue and Customs [2025] UKFTT 663 (TC), the taxpayers were directors and shareholders in a company (CYBC). Its principal activities were the provision of moorings together with services and maintenance, plus additional optional services including the provision of boat repairs and renovation.
The taxpayers incorporated another company (CML), which was the beneficial owner of a company (CMJ). On 1 February 2016, CMJ acquired the share capital of CYBC for £4.3m. On 30 September 2016, CML was sold to another company for £17.8m. The taxpayers claimed entrepreneurs’ relief (ER; prior to being renamed BADR) on the share disposal in their tax returns for 2016/17. However, HM Revenue and Customs (HMRC) denied their ER claim. On appeal, the main issue for the First-tier Tribunal (FTT) was whether CYBC was a trading company for ER purposes for the relevant period leading up to the share disposal on 30 September 2016, and by extension whether CML was ‘the holding company of a trading group’.
Unfortunately for the taxpayers, the FTT did not accept that CYBC was carrying on a single trade. CYBC was exploiting its proprietary rights in land; the “income derived from the exercise of property rights so called by the owner of land (freehold or leasehold) is not income derived from the carrying on of a trade” (per Griffiths (Inspector of Taxes) v Jackson [1983] STC 184). The FTT considered that CYBC was carrying on activities which to a substantial extent included non-trading activities. CYBC’s main source of income during the relevant period was from mooring fees and licences, which was income from exploiting a proprietary interest in land. CYBC’s balance sheet had recorded that 80% of CYBC’s total fixed assets were related to mooring fees. The FTT concluded that ER was not available on the taxpayers’ share disposal.
Practical tip
Watch out for ‘substantial’ non-trading activities, which can result in the failure of the trading company requirement and the denial of BADR. See HMRC’s Capital Gains Manual at CG64090. Seek expert advice if in doubt.
