Trading activities and planning permission

The FTT has held that a company with a property was not a trading company despite appropriating the property it owned to trading stock: Stolkin v HMRC [2024] UKFTT 160. The FTT held that the mere act of appropriating the property to trading stock did not mean the taxpayer was trading in land, just as a person cannot start to trade by doing no more than articulating a desire to do. A taxpayer appropriating property to trading stock cannot have any tax significance if it was not actually carrying on a trade.

In this case, the company had never intended to carry out any property development itself that might amount to a trade. Instead, it had simply taken steps to enhance the value of its investment asset by obtaining planning permission and was not a trading company.

Background

The taxpayers in this case were the shareholders in a company, SGL, that acquired property (the old GSK site in Greenford). When the taxpayers disposed of their shares in SGL, they claimed entrepreneurs’ relief on the disposal. Following an enquiry, HMRC rejected the claim on the basis that SGL did not qualify as a trading company for at least a year in the three year period ending with the disposal.

SGL had acquired the GSK site in 2011 with the intention of holding the property as an investment. However, following a change in planning use of the site made by the local authority in 2013, SGL appropriated the site to trading stock following its decision to seek planning permission for the development of the site into residential, leisure, retail and community use. Planning permission was granted in 2014, albeit in a form that was recognised to be unviable. Accordingly, SGL continued to work towards improving the planning permission. However, in 2015 SGL received an unsolicited offer and the site was purchased by a third party, Greystar.

Decision

The taxpayers accepted that SGL had not been a trading company when it acquired the site. However, they claimed that SGL had been a trading company from the point that it appropriated the site to trading stock until it sold the site with planning permission to Greystar. In particular, they argued that there was a clear profit motive shown by the obtaining of planning permission (enhanced by further associated property purchases of connected land) to enhance the value of the land and sell it.

HMRC argued that the land was acquired as an investment and no trade actually came into existence. As well as a change of intention, it was necessary that the newly intended trading activity must be carried on. Whilst SGL had sought planning permission for a residential development so the site could be sold at a profit, it did not intend to carry on the development itself (which would have constituted the trading activity of property development). The mere fact that it intended to sell the site at a profit was not by itself indicative of a trading intention. HMRC also argued that the badges of trade have limited utility in a case such as this where they might equally be applicable to investing as trading.

The FTT noted that it was common ground that an asset purchased as trading stock can be appropriated to be held as an investment and vice versa. It was also common ground that in deciding whether a trade is being carried on, all relevant factors should be considered, requiring a multi-factorial approach, and at the end one needs to stand back and look at the whole picture. In this, the badges of trade are a useful starting point, but must be applied critically.

The fact that SGL applied and obtained planning permission that was recognised an unviable and needed further work did not mean it wasn’t trading. Nor did the fact that the sale came about from an unsolicited offer by Greystar. However, obtaining planning permission and working on improving that planning permission were merely “the first step along the road” to a property development. Equally, the FTT did not consider that the fact SGL was seeking to make a profit was indicative of trading in this case, where it would be consistent with a desire to maximise an investment return. Nor did the fact that its plans carried some risk, of wasted expenses, indicate trading.

One of the badges of trade is intention to resale at the time of purchase. The FTT noted that “a person who purchases a piece of land with the intention of carrying out some physical work on it, or simply getting planning permission, and "flipping" the land as soon as possible after that has been done, without ever enjoying the land or receiving income from it, would undoubtedly be held to be a trader”.

That had not been the case here. SGL had changed its plans as to how it intended to maximise value from the site in 2013. It no longer wished to develop the site and hold it as a long-term source of income. It did not have the expertise to carry out the kind of development that it was hoping eventually to obtain planning permission for, did it have the required finance available to it to do that. There was certainly a change of plan in how SGL hoped to realise value from the site.

According to the FTT, this factor explains a lot of the decisions in this area which involve consideration of situations where a person changes their mind and sells a capital asset and are nevertheless held not to be trading. Indeed, the FTT expressed the view that “We agree that, in the multi-factorial test, the fact that a person acquired a significant asset to hold (even after some development) long-term as a source of income does not prevent a conclusion that the taxpayer subsequently became a trader in relation to that asset, but we do consider that it is a weight in the balance against such a conclusion. We appreciate that this means that it may be harder for a person to carry on a trade in relation to an asset acquired other than as trading stock than it is for a person who acquires an asset as trading stock and then does the same as the first person does after the point of "appropriation" (more neutrally, changing their mind and deciding to sell). That, we consider, is an inevitable result of land being acquired as a capital asset.”

In this case, the only factors to weigh against the initial decision to acquire the site as an investment was the fact that SGL had changed its plans to seek a better planning permission before selling the site. This amounted to no more than taking advantage of a change of planning use to put its single fixed asset into the best position for an onward sale. SGL was not going to carry out a development or anything that would make a significant change to the site itself. Ultimately, “because of the need to carry out a multi-factorial analysis in each case, none of the authorities we have discussed binds us to find that SGL was not trading, but we do consider that the sheer weight of authority… indicates that, to be held to be trading, a person such as SGL, which acquired the asset which it says is trading stock otherwise than as trading stock, needs to do something more decisive to escape the fetters of the past than simply decide to sell the asset and then do no more than take steps to enhance the asset's value prior to sale”.

Comment

The decision contains a useful summary of the various case law on trading in the context of property development. However, ultimately each case is highly fact dependent. In this case, their was insufficient evidence of any trade being carried on by SGL. Merely seeking to obtain planning permission and taking limited actions to ensure the success of that application was not sufficient to indicate that there was a change in the original intention to acquire and hold the property as an investment. The fact that SGL wished to maximise its profits when an opportunity arose to sell the property at a profit did not of itself indicate that a trade had commened.