Capital gain or trade ?
How do you know if a sale is subject to capital gains tax, or if it is a routine trade ?
If you buy and sell a property or 2, is your profit a capital gain, or a trade sale ?
A simple way of getting an answer to this common question is found in the “9 badges of trade”. These are 9 characteristics to help you answer your question. Here they are;
P-Profit seeking motive
E-Existing trade connections (e.g. A builder who is selling a property)
M-Method of finance
I-Interval between purchase and sale
I-Inherited or donation – the method of acquisition (how was it acquired ?)
O-Operation pending sale
N-Nature of asset
Don’t forget that you have an annual tax-free allowance for Capital Gains Tax known as the ‘Annual Exempt Amount’.
The Annual Exempt Amount for the tax years 2011-12 and 2012-13 is £10,600 for each individual.
If your overall gains for the tax year are above the Annual Exempt Amount, you’ll pay Capital Gains Tax on the excess.
If your overall gains are below the Annual Exempt Amount, you won’t pay Capital Gains Tax.
Here is how the HMRC explains the 9 “badges” or characteristic of Trade