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Share dealing was not trading - loss not allowed | accountingweb
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Relief denied on loss as share dealing not a trade

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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.

14th Apr 2023
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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 [1979] 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.

Replies (8)

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the sea otter
By memyself-eye
14th Apr 2023 12:56

Looks like they got that one right - I would have thought the CGT regime would be better (past tense since the budget) anyway?
Who knows, though he actually had to produce a 'gain' to benefit!

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By Hugo Fair
14th Apr 2023 17:02

Nothing very surprising in the conclusion (based solely on the details above), but some of the FTT's 'logic' seems a mite shaky:

* "Overall, the FTT felt Henderson was not undertaking a trade" ... it's the use of that opinion descriptor "felt" which struck me.

"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."

What are the mechanics for determining trading vs not-trading status via quantifying the number, frequency & regularity of all the transactions?
It sounds as though they just made a subjective judgement along the lines of "that doesn't seem like enough effort to constitute what I imagine is necessary to carry on a trade".

I've known (but not represented) some major recording artists who spend the vast majority of their time 'communing with their creative spirit' - which only very occasionally transmutes into an item that is sold. Woe betide anyone trying to apply O&M measurements to their daily activities!

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Replying to Justin Bryant:
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By Justin Bryant
28th Apr 2023 14:19
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By petestar1969
17th Apr 2023 11:47

Hmm, he should have just done spread bets instead. No tax at all.....

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By nazman
17th Apr 2023 13:01

I am a Chartered Accountant running a full time practice. I have been dealing in shares in partnership with my wife since early nineties. To start with, I have had a long struggle to convince the then the Inland Revenue that my activities amounted to trade and have had no problem since then. The value of my share dealing activities has ranged from no trade in a couple of years and as low as £76k to as high as over £7m. Fortunately, I have always made a profit from 2016/17 to date, but I was able to offset all my previous losses against the current profit. In my opinion it is the frequency of the transactions which determines the trading or investment status. If you buy in the morning and sell in the afternoon or soon afterwards, then the label of investment or growth will not stick.

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Replying to nazman:
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By AndyC555
19th Apr 2023 16:01

Congratulations on your successful share dealing.

However, your opinion that it is the frequency of the transactions which determines the trading or investment status is not one shared by HMRC. It is but one of many factors taken into account and HMRC can point to the Manzur v HMRC case where....

"The number and frequency of transactions, and the short-term nature of the holdings alone did not establish trading."

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By mydoghasfleas
03rd May 2023 09:09

For the period 2015 to 2017 the FTSE100 moved from 6,242 to 7687 (source https://www.statista.com/statistics/261764/annual-development-of-the-fts... ) in the next year it dropped to 6,728. I appreciate there would have been fluctuations but it looks losses in a rising market and profits in a falling market.

One question did The Sporting Life and Racing Post feature in the research? If he was a contrarian "investor" perhaps that view lead him down a path to the FTT taking the opposite view.

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