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Is your client trading in shares for loss relief purposes?

21st Jun 2023
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Many clients buy and sell shares, and increasingly trade in more diverse asset classes such as cryptocurrency. They might ask if this activity amounts to a trade, with a view to claiming income tax loss relief. How might a recent case help answer this?

image of man looking at share prices
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Trading or investing?

Individual clients may argue that their share transactions amount to a trade, as this means that any losses they generate could be claimed as sideways loss relief against general income. In practice, it’s incredibly difficult for an individual to be carrying on a trade in buying and selling shares for tax purposes. Normally, such activities are considered investment in nature, meaning any gains or losses are subject to the capital gains tax provisions.

Advice. It’s common for the purchase or sale of a share to be described as executing a “trade”. This doesn’t mean that such transactions are considered a trade for tax purposes.

The question of whether a taxpayer is undertaking investing (rather than trading) activities when it comes to share dealings has been discussed in case law, notably in Salt v Chamberlain as well as Wannell and Manzur. A recent First-tier Tribunal (FTT) case has also addressed this issue.

No loss relief

In Henderson v HMRC [2023] TC08755, the taxpayer (H) inherited a substantial amount of money and decided to retire from his role as a partner in a professional firm. H resumed making execution-only share transactions, which were all on his own account: he was not a registered or regulated trader, and he would hold shares for between a few days and several months at a time.

H made losses on his transactions in 2015/16 and 2016/17. While he made a profit in 2017/18, this profit was smaller than his aggregate losses for the previous two years. He claimed loss relief against his general income, restricting his claim to £25,000 - the restriction applies where an individual carries on a trade in a non-active capacity.

HMRC took the view that H’s activities did not amount to a trade or, if they did, that the trade was not carried out on a commercial basis, and refused the claims for loss relief. H appealed.

Decision

The FTT agreed with HMRC. When standing back and looking at the overall picture, H was not carrying on a trade in share dealing. It noted that H undertook an average of just over one trade per week, which was not a pattern that was clearly indicative of a trade in share dealing .

The fact H spent one or two hours per day on activities connected with the share transactions, and did not follow any specific pattern of work, also suggested that H was undertaking an investment activity to manage a portfolio of personal investments. The appeal was dismissed.

Further reference

The test of whether an individual is undertaking a trade in share dealing is broadly the same approach that should be applied when considering if a client is undertaking a trade in cryptoassets - refer to CRYPTO20250 for further commentary.

While clients might want to argue that they are undertaking a trade in share dealing, particularly if they have made losses that they would like to relieve against their general income, the Henderson case shows it is very likely HMRC would challenge any such position. If a client really is trading, they need to keep appropriate records and evidence to show that their share dealings are outside the norm.

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