HMRC is on the hunt: Are you trading or investing in property?
Property sales are coming under increased scrutiny from HMRC.
Over the last few decades, investors have taken advantage of opportunities to buy up dilapidated properties, refurbish or develop and then sell on for what can be a significant profit. HMRC has got wise to this practice and has become increasingly more aggressive in reviewing the background to determine if the individual is either investing or dealing in land.
In some cases, this can result in a nasty shock in that HMRC can take the stance that the individual is running a business of trading in property and that the proceeds should be subject to both income tax (up to 45%) and national insurance (up to 6%). Whereas typically the net chargeable gain (i.e., the difference between the sales proceeds and the original cost of the property) over the annual exempt amount would be subject to capital gains tax (up to 24%).
What’s the difference between property investing and trading?
The tests to decide if an individual (and indeed companies and trusts) is investing or dealing in land are called the badges of trade. The badges can be summarised as follows:
| Badge of trade | Typical indicators of investing | Typical indicators of trading |
| Profit seeking motive | Aim is to hold property for rental income and potential long-term appreciation | Aim is to sell quickly for a profit (property flipping) |
| Frequency and number of transactions | Occasional sales, often years apart | Multiple property purchases and sales in a short period |
| Modification of the asset | General repairs and maintenance to keep the property in a good state of repair | Significant redevelopment works to increase the sale price |
| Nature of the asset | Residential or commercial property intended for ongoing use or letting | Property chosen for resale and profit potential |
| Connection with an existing trade | No link to an active property development or construction business | Buyer could be running an existing business, perhaps as a builder or property developer |
| Financing arrangements | Long-term mortgage or buy-to-let finance | Short-term loans or bridging finance aligned with the intention to sell on |
| Length of ownership | Held for several years or more | Sold within a short period after purchase |
| Reason for acquisition / sale | Acquired to let out and generate an ongoing income | Bought to develop and sell for a profit |
It is not necessary for every property transaction to satisfy all the badges to be regarded as a business. Indeed, some investment properties may satisfy one or more of the badges too. However, some of the badges carry greater weight than others.
Importantly, whilst the distinction is not as important for companies that buy and sell property as the corporation tax rate and chargeable gain methodology are broadly the same in either case, it is important for the shareholders. Their shares will form part of their estate for inheritance tax (IHT) purposes. Shares in companies that qualify as trading companies will attract Business Property Relief which will significantly reduce the IHT exposure and can lead to planning opportunities to avoid significant changes to the regime coming in in April 2026.
What can i do to avoid being caught out?
More often than not, the determination on whether the individual is investing or dealing in land will come down to the intention at the time that the property is purchased.
For example, an individual acquiring a property to provide rental income which is held for a number of years is likely to be treated as an investment; whereas a builder who acquires a large house on a substantial plot that is redeveloped into a number of flats which are then sold on quickly, is likely to be a viewed as a business venture, with the resulting profits being subject to income tax and national insurance. However, that’s not to say that it wouldn’t be possible to develop a house into flats with the intention to let out those flats to provide a long-term income for the individual – there are shades of grey. In any event, life can overtake the best laid plans!
There is nothing to stop HMRC, if they believe that they have reasonable grounds, from opening an enquiry.
It is therefore vital to retain clear documentation from the onset of the intention at the time of buying as the key to establishing the circumstances at that time. Business plans and finance proposals should be retained. For example, was a short-term loan taken out to finance the property development, or a 10 year buy to let?
Where there is any doubt, the situation should be considered carefully, bearing in mind the facts and the individual’s intentions.
What next?
In light of HMRC’s growing interest in this area it is always worth reviewing your plans to make sure that they are as well-structured for tax purposes.
If you would like to discuss your property portfolio or HMRC have opened an enquiry, then please contact Thomas Adcock, who will be able to help you.
Similar Insights
Understanding the talk around a UK exit tax before the 2025 Budget
The Chancellor’s proposed changes to partnership tax could have wide implications across professions
How share schemes can help businesses respond to higher National Insurance costs
Sign up to Gravita's latest updates and newsletters
Stay up-to-date with our event invites, latest news and updates, straight from Gravita's experts.