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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Financial traders - instruments and shares: case law and individuals

In the past, the approach taken in deciding whether a company is carrying on a trade of buying and selling shares and other financial instruments has been different from that adopted for individuals. The basis for this lies in the comments of Pennycuick J in Lewis Emanuel & Son Ltd v White [1965] 42TC369. At page 377 he said:

‘The word “speculation” is not, I think, as a matter of language, an accurate antithesis either to the word “trade” or to the word “investment”: either a trade or investment may be speculative. On the other hand, it is certainly true, at any rate in the case of an individual, that he may carry out a whole range of financial activities which do not amount to a trade but which could equally not be described as an investment, even upon a short-term basis. These activities include betting and gambling in the narrow sense. They also include, it seems to me, all sorts of Stock Exchange transactions. For want of a better phrase, I will describe this class of activities as gambling transactions…’

For companies, however, the position was different. Pennycuick J said:

‘it is much more difficult to bring the activities of a company within the class of gambling transactions. An individual may do as he pleases: a corporation must act within the limitations of its memorandum of association…where a transaction can be brought within the scope of an authorised object - e.g. investment or dealing - one would not readily treat the transaction as having been carried out … in pursuit of an unauthorised object e.g. gambling. In other words, one expects a trading company’s activities, apart from capital investment, to be by way of trade.’

Pennycuick’s view that, for individuals, share transactions could amount to investment, trading, or speculation falling short of trading, was followed in Salt v Chamberlain [1979] 53TC143. Oliver J said:

‘Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be, as Pennycuick J suggested in the Lewis Emanuel case, that he is not. It is for the fact finding tribunal to say whether the circumstances proved in evidence or admitted take the case out of the norm.’

So for individuals we take the view that transactions in shares which do not amount to investment are speculative transactions falling short of trading, unless there are particular factors which take the case ‘out of the norm’. There is more on this at BIM56860.

Shares which are dealt with speculatively or as investments are dealt with under the Capital Gains Tax rules. For futures, options, and contracts for difference (including swaps), see BIM56880 and BIM56900.

There is more on the treatment of companies at BIM56870.