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There are a number of criteria HMRC apply in order to define whether a person is trading. These are referred to as the badges of trade and they fall into the following categories:

• Profit seeking motive
• The number of transactions
• The nature of the asset
• Existence of similar trading transactions or interests
• Changes to the asset
• The way the sale was carried out
• The source of finance
• Interval of time between purchase and sale
• Method of acquisition

Land transactions are most commonly challenged by HMRC due to the size of the transactions and the profits involved. Below is an example which should help you understand the HMRC definition of trading.

For example, suppose we have Chris, a builder, who buys a property in need of renovation. Chris moves into the property and lives there. While there he renovates the property and 12 months later sells it, making a substantial profit.

This on its own is not likely to be enough for HMRC to claim that Chris was carrying on a trade. But now, Chris buys another property in a similar condition, renovates it and sells it 18 months later, again for a significant profit. He then does this a third time.

By this time HMRC are likely to deem Chris to be trading. There have been a number of transactions of sufficient frequency and profit. Further, Chris has modified each property before selling it at a profit.

How is Chris taxed? Usually we think of profits on property as being charged to capital gains tax (which would typically be taxed at 28%). However, as Chris is trading his profits are charged to income tax – a much higher rate of tax.