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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Measuring the profits (particular trades): land: trading transactions: supervening trade

S161 Taxation of Capital Gains Act 1992, S57 Income Tax (Trading and Other Income) Act 2005, S61 Corporation Tax Act 2009

Although we may accept that land was acquired as a capital asset or as an investment the facts may suggest that it was subsequently developed or dealt with in such a way that it became stock of a newly set up trade or adventure in the nature of trade. This is the concept of supervening trade.

There is judicial support for this concept in dicta in Taylor v Good [1974] 49TC277 at page 287, Lionel Simmons Properties Ltd v CIR [1980] 53TC461 at page 491, and Page v Lowther [1983] 57TC199 at page 217.

Worthwhile cases should be pursued where it is possible to identify a clear change of intention with regard to the land. Such a change must be shown by reference to objective factors. An example might involve the demolition of a warehouse previously held as a capital asset and the construction for sale of residential flats. It is once again a question of fact and degree. The greater the change in character of the land, the stronger the argument that a supervening trade has commenced.

The change of intention will involve an appropriation of the capital asset to trading stock when the trading activity begins and there will therefore be a deemed disposal at that moment for Capital Gains Tax purposes. The determination of that moment is a question of fact. You should therefore ensure that you examine the history of the project in sufficient detail to be able to identify and, if necessary, to argue for the appropriate date. This date will of course have implications both for the valuation of the land and the expenditure that is allowable as a trade expense or even as pre-trading expenditure under the legislation.

All cases involving supervening trading should be submitted to CTISA before listing for a contentious hearing before the tribunal.