Relief denied on loss as share dealing not a tradeby
A taxpayer found out the hard way that when an individual buys and sells shares the activity is rarely treated as a trade for income tax purposes.
Nicholas Henderson was a partner in a professional firm. Since 2006 he had, intermittently, bought and sold shares in a personal capacity, treating those earlier transactions (which took place prior to the years under appeal) as capital for tax purposes.
In 2014, Henderson inherited a substantial amount of money and retired from the partnership in January 2016, to devote more time to his share trading activities. Henderson resumed making execution-only share transactions, and the returns from these investments were the subject of this appeal.
The transactions were all on Henderson’s own account. He was not a registered or regulated trader and did not buy or sell shares on behalf of third parties. He would hold shares for between a few days and several months.
Rise and fall of share transactions
Henderson bought shares that he thought would appreciate in value in the short term, so as to sell them at a profit. While he had no written plan for the share-trading activities, he aimed to achieve an average profit of £5,000 per month based on maximum funds at any time of £100,000, although this figure was “more of a desire than the result of any calculations”.
He carried out research by reading company accounts, reviewing regulatory news releases from companies, and reading the financial press and investment magazines and websites.
He carried out transactions when appropriate, being led by research rather than a need to carry out a particular volume of purchases or sales. He undertook the following transactions on an execution-only basis for the years under dispute:
- 2015/16 – 31 sales, 28 purchases
- 2016/17 – 54 sales, 53 purchases
- 2017/18 – 19 sales, 7 purchases.
Henderson made losses on the transactions undertaken in 2015/16 and 2016/17. Although he made a profit in 2017/18, this was smaller than his aggregate losses for the previous two years.
In May 2017, Henderson took up new employment, in part because he was offered an interesting position, but also because he had concluded that the income from his share transactions was not increasing quickly enough to support his outgoings. By 5 April 2018 he had sold all but three shareholdings.
Loss relief claims denied
Henderson claimed sideways loss relief under section 64 ITA 2007 on the losses arising from his share trading activities, on the basis they were deductible trading losses. As he could not demonstrate that he had spent more than 10 hours per week on average across the tax year on the activity, Henderson restricted the sideways loss relief claims to £25,000, per section 74A ITA 2007.
In February 2020, HMRC issued closure notices for the 2015/16, 2016/17 and 2017/18 tax years, on the basis that the activities did not amount to a trade or, if they did, the trade was not carried out on a commercial basis, which would deny relief under section 66 ITA 2007. Henderson appealed (TC08755).
Trade or not a trade
The first tier tribunal (FTT) had to determine whether Henderson’s circumstances were such that the prima facie presumption that he was not trading (per Salt vs Chamberlain  53TC143) had been displaced.
The FTT first considered the number of transactions Henderson undertook in the years under appeal. This amounted to just over one transaction per week on average, with a maximum of nine trades in a single week and several weeks with no trades. This pattern was not indicative of a trade in share dealing.
Henderson spent one to two hours per day on activities connected with the share transactions, and did not follow any specific pattern of work. Again, the FTT found this did not support the contention Henderson was trading.
Overall, the FTT felt Henderson was not undertaking a trade. Rather, he was managing a portfolio of personal investments, albeit for growth rather than income (he did not seek dividend income from the shares and received very little dividend income). However, the fact that growth, rather than dividend income, was sought did not make Henderson’s activities a trade.
Even if the FTT was wrong as to whether Henderson was trading, it found he was not undertaking the activity in any organised or commercial manner, meaning relief would have been denied on non-commercial grounds.
The appeal was dismissed.
Gains and losses
The default presumption for an individual involved in share dealings is that they are carrying on an investment activity. This means that any gains or losses realised on a share sale are typically subject to the capital gains tax provisions.