23 Jan Can share dealing ever be a trade?
A 2016 case considered whether share dealing could be a trade, with any losses from it available for offset against general income. What was the outcome?
General rule. The usual advice is that losses from speculating on the stock market can’t be offset against a client’s other income (sideways loss relief) when calculating their tax bill. They are capital losses which can only be offset against any capital gains in the same year or carried forward to offset against future gains. However, a recent case has demonstrated that this may not always have to be the case.
Case facts. In A Ali v HMRC, Mr Ali (A) used the profits of his successful pharmacy business to buy and sell quoted shares. From 2006/7 onwards, he reported the results from his share dealing as a separate trade on the self-employment pages of his tax return. These showed losses for all the years from 2006/7 to 2011/12 which he claimed against the income from his pharmacy business.
Tribunal decision. The First-tier Tribunal (FTT) said that four of the badges of trade (the length of the period of ownership, the number of similar transactions, the way the sale was carried out and the profit-seeking motive) pointed firmly towards the share dealing being a trade. The FTT then considered the 1979 case of Salt v Chamberlain where it was decided that speculating in shares can look like trading and yet not constitute a trade because it’s really just gambling. However, the FTT felt that in this case, the fact that A had drawn up a business plan for his share dealing and had carried it out in a reasonably organised manner pointed away from gambling. The FTT therefore decided that A’s share dealing was a trade so the losses could be offset against his other income.
Tip. This case shows that, in certain circumstances, clients may be able to claim sideways loss relief for quoted share losses. Drawing up a detailed business plan for the activity should help their case.
The First-tier Tribunal found that, in certain circumstances, the buying and selling of shares can constitute a trade and the losses generated by it set off against other income. Persuasive evidence was the presence of a business plan and the fact that the taxpayer had undertaken the dealing in a sufficiently organised manner.