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Commercial property letting - can it be a trade

I 'dabble' in commercial property letting

Didn't find your answer?

Currently, I have a small factory and a small freehold office. The factory is let full time, and the office on an ad hoc basis. I am now adding a cafe - so I suppose I must claim to be an 'investor'!

I understand that income from property is a business but not a 'trade'.

Does this distinction really matter? Is there a point (in terms of number of premises etc) at which point you can claim to have a trade?

These are all owned personally.

Thanks,

Replies (17)

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Replying to Wanderer:
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By Paul Crowley
29th Mar 2021 13:39

Letting property and providing additional services
Where the customer lets property and provides additional services to the tenants it is a question of fact whether:

the whole activity (the letting of property and the services) amounts to a trade, or

the whole activity is part of their rental business, or

the provision of services amounts to a trade that is separate from their rental business.

Copied from link by Wanderer
So HMRC suggest letting with extra services can be:
1 A trade
2 Letting, (not a trade)
3 A bit of both

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By Paul Crowley
27th Mar 2021 10:24

I think property can be a trade but the activity level needs to be significant. Traders must be specifically active in that trade, it must use their time.
But as a trade National insurance is due.

I have one that would probably qualify but do not see the point as NI would be payable

The rent expenses include costs that look like trading

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Replying to Paul Crowley:
Routemaster image
By tom123
27th Mar 2021 12:04

Thanks - so actually a disincentive to become a 'trade' then..

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Replying to tom123:
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By Paul Crowley
27th Mar 2021 12:31

The comment usually comes up about Class 2 NIC so as to get state pension qualification
A person with a property business can volunteer for class 2 without going the trader route
Having thought about it I have one that pays wages to wife as operates both normal lets and a House in multiple occupation.
Another that has an industrial site and builds commercial units to rent
Neither showing as traders
I was not agent at start of either of these, just accepted prior treatment
Both have significant time activity and trading type costs to be seen as trades. Both would also pay the full Class 4 NIC if reported as trades

Not aware of any HMRC challenges on matters to date

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Replying to Paul Crowley:
Hallerud at Easter
By DJKL
29th Mar 2021 12:38

They surely are not though, getting trading treatment for investment property would be the holy grail re both CGT and IHT, we have never managed.

At peak we had £1.5m of rents, two full time handymen, one full time employee for admin/accounts (me) plus outsourced tenant management (They share our office) a slew of commercial vehicles, towed cherry picker, breakers, work platforms, site fences, secure plant store containers and myriad other plant, yet the property investment business is not and never was a trade.

We did have trades , which were construction work for others plus fairly significant property development (buy sites, sort out a planning, sell larger sites to housebuilders) ,and were required to split costs/apportion re the two activities for tax purposes (we had negotiated an apportionment method with HMRC during an enquiry in the early 90s)

If anyone can get property investment to qualify for BPR, or even ER, we would be more than interested as the latent IHT bills currently faced are eye watering.

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Replying to DJKL:
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By Tax Dragon
29th Mar 2021 12:58

DJKL wrote:

If anyone can get property investment to qualify for BPR, or even ER, we would be more than interested as the latent IHT bills currently faced are eye watering.

Would such an answer need to stand up in court? How quickly would you need it? I assume you would be willing to pay for it?

(has papafur started a trend?)

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
29th Mar 2021 13:15

Afraid it needs to stand up in court, and yes, more than happy to pay fees for good ideas (Albeit tripping large latent CGT bills inherent within the properties to get to a solution would not be ideal, we have a few March 82 property valuations as some properties were acquired before then (even have some that are 60s purchases) which gives a flavour of the scale of some of the gains)

We have to date spent about £15,000 in fees (inc vat)re initial appraisal of where we stand and I am currently awaiting a fee quote re phase two (Varying share classes, issuing growth shares and a shareholder agreement to draw matters together- we have gone to Scottish solicitors with an in house tax team/CTA re this after a beauty parade)

To complicate matters we also have a property investment partnership as well as the main limited company to consider, stage three of the IHT planning will be looking at the partnership agreement with succession planning in mind.

We are always willing to pay for good ideas but the owners are sensibly risk averse re their tax planning, if tax planning can be graded from 1-10 (10 being HMRC will take things all the way), we are probably a 2 or a 3.

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By Tax Dragon
28th Mar 2021 07:56

I recall Mum telling me (though I don't now know whether it was her client/anecdotal/Mum's sense of humour in coaching me) that HMRC had argued that a B&B was two sources of income. There was an investment stream from letting the room. There was a trading stream of providing a meal.

The letting of property is never, of itself, a trade. And, categorically, HMRC will never seek to argue that it is. (And @Paul... these things aren't a matter of choice. If you have a trade, you should pay tax and NIC accordingly.)

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Replying to Tax Dragon:
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By Wanderer
28th Mar 2021 17:24

Tax Dragon wrote:

I recall Mum telling me (though I don't now know whether it was her client/anecdotal/Mum's sense of humour in coaching me) that HMRC had argued that a B&B was two sources of income. There was an investment stream from letting the room. There was a trading stream of providing a meal.

They still hint towards this possibility in PIM4012.
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Replying to Wanderer:
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By Tax Dragon
29th Mar 2021 10:33

Interesting. Thanks Wanderer.

I note that PIM4300, to which you provided a link, is clear that B&B is a trade. Maybe it once said otherwise? Don't know. But Mum's point makes sense to me - if I have a million bank accounts with £1,000 in each, then a) what am I doing on Aweb?? and b) although managing my many accounts might be a fulltime job, that doesn't mean that I have a trade of being paid bank interest.

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Replying to Tax Dragon:
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By More unearned luck
29th Mar 2021 13:32

Your mum was not making it up. In Griffiths v Pearman and Griffiths v Jackson the facts were:

"The taxpayers had a number of furnished properties which they let on a short-term basis to tourists and students. Various services were available, including the provision of laundry, food, flowers and car hire, although some applied only to a particular property. The taxpayers spent approximately five hours of each day on work connected with letting the properties."

Mr Justice Vinelott held:

1. It was a general principle of law that income derived by a property owner from the exploitation of his land, howsoever let, was not income derived from carrying on a trade.

2. Income from the provision of services, if the amount was charged for separately or could be apportioned, was taxable as the profits of a trade.

3. The General Commissioners had erred in law, for, although letting furnished properties may be classed as a business, it did not follow that the taxpayers were carrying on a trade.

Clearly wrongly decided (where does that leave hotelkeepers?). Nevertheless these and other cases led to the introduction of the FHL regime to placate, as I was told, the indignation of Blackpool landladies on being told that some of their income was not NRE.

Returning to the OP's query, what he does will never be a trade, but landlords can be classed as a self-employed earner for class 2 NIC purposes. NIM23800.

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Replying to More unearned luck:
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By whitevanman
29th Mar 2021 21:37

I don't think Vinelott J got it wrong. On the contrary, in light of the schedular system of tax, he clearly got it right.
The position of hoteliers (and Blackpool landladies) would be that of the B&B owners to which my previous reply made reference- in many cases there would be trading activities and the payment for such services would be taxed as trading income. Apportioning the nightly charge between "rent" and payment for services provided would be very difficult and practically pointless so, taxing all as trading income was logical.
I seem to recall the change to FHL rules was to "support" the failing tourist trade generally. It resulted in a more equitable tax treatment for those who did not provide services at a sufficient level to amount to trade and certainly some of the guesthouses that provided only rooms would have benefitted from it but it did affect a much wider group of people.

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Replying to Tax Dragon:
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By whitevanman
29th Mar 2021 13:39

One of the few advantages of having clung to life for a while is knowing how things were and how they have evolved.
Those of us who remember the schedular system know that all types of income were fitted to specific schedules, each with it's own rules, and that the courts ruled that the schedules were mutually exclusive.
So, Sch A charged rents and other receipts from property. Sch D, under cases I and II, charged the profits of a trade, profession or vocation. It follows that rent was not considered (by the legislature) to be trading income.
Despite changes in format, I don't believe the principle has changed.
One can of course have a related activity, such as B&B where activities may amount to the carrying on of a trade. That does not necessarily mean that"rent" is being charged as trading income. The problem would be in splitting the price paid between payment of "rent" and payment for services. For practical purposes therefore, some such activities are simply taxed as a trade.
This cannot be said of a business that comprises commercial lettings because what is received is nonetheless rent. It is the nature of the income that matters not the nature of the proprietor's activities.
A landlord may provide other services (broadband, security etc) and charge an inclusive fee and those activities could be such as to amount to the carrying on of a trade etc. Strictly the fee should be split between the various elements and taxed accordingly.
As time passes (and as trading rules now apply to the calculation of rental income) the significance of the distinction changes and HMRC will only (usually) challenge matters where there is a significant tax consequence.
That said, I don't consider the OP is receiving trading income on the few facts given.

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Replying to whitevanman:
Hallerud at Easter
By DJKL
29th Mar 2021 13:49

And of course Schedule D Case VI re furnished lettings not falling within Schedule A as the rent was not just for the use of the land but also for the use of the furniture.

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Replying to DJKL:
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By whitevanman
29th Mar 2021 21:49

Indeed and I seem to recall that, at the time, the rules governing the taxation of income under case vi were different to those applicable to case I or ii and the rules applicable to Sch A were different to both. It made a bit of sense to rationalise things and recognise (to some extent) the realities of the modern world. Unfortunately, like much of our tax system, it is still founded on the world as it was in the late 19th century and simply tinkering with bits does not result in a system fit for the 21st century.

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Replying to whitevanman:
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By Tax Dragon
29th Mar 2021 14:28

Thanks MUL, thanks WVM.

Interesting background.

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