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HMRC internal manual

Business Income Manual

Amounts treated as profits of a trade of dealing in UK land: Main purpose or one of the main purposes

Conditions A, B and D contain a test of whether the “main purpose or one of the main purposes” for acquiring or developing the land, or the property deriving its value from land, was to make a profit or gain from disposal of land. This is a test of purpose, not of benefit or expectation.

The concepts of ‘the main purpose’ and ‘a main purpose’ are used widely in UK tax law.  A person may have more than one main purpose in entering into a transaction, and ‘a main purpose’ is a wider test than requiring something to be ‘the main purpose’.  It is therefore important to consider the question of trading alongside a main purpose test when considering whether or not this legislation applies, to ensure that what are genuinely non-trading transactions are not brought within its scope.  

An example of a type of arrangement where a main purpose test might be invoked would be a fact pattern similar to that in Ransom v Higgs [1974] 50TC1.

If a person buys land with the intention of building on part of it to retain for their own purposes, and of building on the rest of it for sale at a profit [in a manner consistent with trading activity], it is clear that one of their main purposes is to make a trading profit from development and disposal. In this instance at the point of acquisition the precise section of the land to be disposed of and the costs relating to that section may not be known. If this is the case profits should be calculated using the original cost of the land apportioned on a just and reasonable basis, subject to the anti-fragmentation provisions.

It may be the case that an investor in UK property expects primarily to benefit from capital growth over time, in addition to obtaining rental yield. The legislation requires that a main purpose of the arrangement is to obtain a gain from disposing of the property. This condition will not be met in the case of straightforward long-term investment, where the economic benefit arising to the owner is the result of market movement from holding that asset rather than transactions that are in the nature of trading.

An owner may also seek to increase the value of their property through improving the quality and security of the property’s rental income, for example by negotiating longer leases. Alternatively, they may improve the property through some form of refurbishment in order to attract higher paying tenants, or subdivision of the property to attract more tenants, which again would increase the value of the property. Rental income is often an indicator that the asset is held as an investment, although this is not conclusive - an asset held for trading purposes could produce rental income over a relatively short period, equally an asset held over a longer period may for a number of reasons not produce income but could still be seen as an investment. The facts of each case will determine whether or not one of the main purposes is to make a trading profit from development and disposal.

It is possible for the intention to change over time, at which point the main purpose test would need to be reconsidered (see examples 3, 4 and 5 below).

Example 1

A non-resident property investor purchases a property with the primary purpose of realising rental income from the land purchased. When the investor purchased the land one of the factors they considered was likely capital appreciation of the land. After letting out the property for 7 years they make some repairs and dispose of the land.  This is an example of an investment not trading transaction. The main purpose of the transaction is the rental income. Whilst the long term capital appreciation could be a reasonable expectation, it is clearly not a profit from a disguised trading transaction and would not therefore meet condition A.

Example 2

A non-resident property investor purchases a property with the intention of developing then selling the property. After developing the property they let it out for 6 months while they wait for the market to pick up. In this instance a main purpose of acquiring the land, was to realise a profit from disposing of the land and condition A would be met.

Example 3

An individual property investor acquires an old block of flats. They rent the flats out for several years then decide to build new flats on the site. They obtain planning permission for a new development which they complete and sell.

In this example there has been a change of intention and Section 517L ITA 2007 will apply. Only the profit relating to the period after the change of intention should be taxed as a trading profit. The portion relating to the period where there was an investment intention should not be included in the tax calculation. 

Please see BIM60825 for details on apportionment.

Example 4

Company X purchases 100% of the share capital of company Y, which owns a UK property on investment account. Company X has the intention of realising a profit in a manner consistent with trading activity, by procuring company Y that subsequently sells the property.

This would fall under Condition B.

In this example there has been a change of intention and Section 356OL CTA 2010 will apply. Only the profit relating to the period after the change of intention should be taxed as a trading profit. The portion relating to the period where there was an investment intention should not be included in the tax calculation. 

Please see BIM60825 for details on apportionment.

 

Example 5

An individual purchases a rundown block of flats.  They intend to develop the flats into luxury apartments. After development they intend to keep 55 for rental and sell 45. In this instance a main purpose of acquiring the land was to realise a profit or gain from disposing of it so condition A would be met.  The profit relating to the 45 apartments should be taxed as trading income. Where it is not possible to specifically identify costs relating to the 45 apartments a just and reasonable apportionment should be used.

 

Example 6

A non-resident property investor purchases an ageing block of offices in a prime location with the primary purpose of realising rental income from the land purchased. In order to achieve a higher rate of rent and a better quality of tenant, the investor redevelops the offices soon after the acquisition and then lets out the redeveloped offices for a period of 5 years. After such time they dispose of the land at a gain. In this instance the main purpose of the transaction is the rental income. Whilst the office block is redeveloped, the primary purpose for doing so is to improve the yield from the investment rather than to realise a gain.

Example 7

A non-resident property investor purchases a property with a view to obtaining an income stream from the land purchased. At the time that the investor purchased the land it anticipated holding the property for over 5 years. In fact, after 2 years, the investor suffers a liquidity event and is forced to sell the property. The main purpose of the transaction is the rental income and the sale was motivated by a sudden unforeseen emergency. Condition A would not be met in this instance.

 

Example 8

A non-resident property investor purchases a property with a view to realising long term capital appreciation from the land purchased. The company will have to wait a significant number of years before the lease ends, or the tenant is prepared to surrender the lease. During the time that the property is held, the rental profits are poor, perhaps due to a rent-free period or vacancy arising from unexpected occupier insolvency. The investor sells the property after 5 years for a significant profit due to a market increase in the value of the land. This is an example of an investment and not trading transaction and condition A would not be met.

 

Example 9

A non-resident property investor purchases a property with a view to realising rental income from the land purchased. At the time that the investor purchased the land it anticipated holding the property for over 5 years. In fact, after 18 months, the investor sells the property early as a result of unforeseen circumstances. In this instance the main purpose of the transaction is the rental income and the sale was motivated by unforeseen circumstances so condition A would not be met.