Property Trader or Property Investor? why it matters for tax

If you are involved in property, it is important for tax purposes to be aware if your activities will be classed as trading or investment. The distinction is important as trading activities benefit from generous tax reliefs and rates.

A property trader will hold an asset in stock, it will add value to a property through, for example, refurbishment, and will aim to sell in a fairly short period of time. Think of your classic ‘flip and sell’  property developers. 

A property investor, on the other hand, is in it for it for the long haul. Properties are purchased for long term investment and although income will be received through rent, the aim is for the property value, the investment, to increase over time. 

The distinction seems simple but when the property market slows, property traders can be forced to hold onto their stock. Idle stock is not desirable, resulting in some developers seeking short term tenants to assist with cashflow. 

What does this have to do with Stamp Duty Land Tax?

Well, there are a handful of lesser-known reliefs available to property traders who are purchasing residential property.

To qualify, a property trader must be a company, Limited Liability Partnership (LLP) or partnership whose members are all companies or an LLPs, which carries out the business of buying and selling property. Relief is not available to sole traders, individuals, or individuals in partnership. 

This relief is designed specifically to help facilitate the property market and keep things moving and is applicable in two scenarios:

1. Purchasing from personal representatives of a deceased person; and

2. When you step into a chain which has broken down. 

If all conditions are met, the property trader can receive full relief from SDLT. Despite recent changes to SDLT, it is a potentially valuable relief, especially if the surcharges are applicable, representing a considerable cost-saving for a trader.

Is there a catch?

This relief is geared towards ‘flip and sell’ developers as any refurbishment works are limited. Refurbishment works are limited to £10,000 or 5% of the consideration, whichever is the greater, up to a maximum of £20,000.

Remember to check the fine print as there are specific conditions to be met by the previous owners and the use/occupation of the property once purchased.  

For example, in the case of purchasing from personal representatives of a deceased person the deceased must have lived in the property as their main residence within a two-year period preceding their death. In addition, once purchased the property cannot be leased, licensed or occupied by anyone connected with the directors, principals or employees of the purchaser. 

SDLT is chargeable at purchase. Provided the conditions are met and your intention is to perform the permitted amount of refurbishment works, relief can be claimed. However, if your intention for the property changes the underpaid tax must be repaid to HMRC. For example, if you are unable to sell the property and you decide to issue a short-term lease in the interim, the relief is withdrawn. 

If you are eligible, the relief can be extremely beneficial to property traders. HMRC is likely to challenge the application of reliefs, especially in the current climate as the prevention of tax losses are a high priority. Make sure to talk to your tax adviser to check the fine print. 

* Natasha Heron is a Tax Manager at accountants Hillier Hopkins *

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