The pitfalls of Share Dealing – Are You Trading for loss relief?

The recent case of N Henderson v HMRC [2023] TC8755 shows that it is not always easy to distinguish whether dealing in shares is an investment activity or enough to warrant being treated as a trade for tax purposes. This distinction is crucial when using sideways loss relief against other income.

Background and Transaction History

Nicholas Henderson was a former partner in a professional firm, had a history of engaging in intermittent personal share transactions since 2006. He treated these earlier transactions as capital for tax purposes, which occurred before the years under appeal.

In 2014, Henderson inherited a substantial sum of money and decided to retire from his partnership role in January 2016 to focus more on his share trading activities. He resumed making execution-only share transactions, and the returns from these investments became the subject of the appeal.

All transactions were conducted on Henderson’s personal account, and he was neither a registered nor regulated trader. His trading strategy involved holding shares for varying periods, ranging from a few days to several months.

Henderson aimed to buy shares that he believed would appreciate in value, allowing him to sell them for a profit. Though he did not have a written plan or investment strategy, his aim was to achieve an average monthly profit of £5,000 based on maximum invested funds of £100,000, albeit without any specific calculations.

He conducted his own research by studying company accounts, reviewing press releases, and investment blogs and journals. His transactions were influenced by his research rather than a need to meet specific purchase or sales targets.

The following are the numbers of transactions carried out on an execution-only basis during the disputed years:

• 2015/16 – 31 sales, 28 purchases
• 2016/17 – 54 sales, 53 purchases
• 2017/18 – 19 sales, 7 purchases.

During 2015/16 and 2016/17, his investment strategy generated losses on his share. While he made a profit in 2017/18, it was smaller than the combined losses from the previous two years.

In May 2017, Henderson took up new employment, partly due to an interesting opportunity and partly because he concluded that the income from his share transactions was not achieving the required levels to meet his personal expenses.

By 5 April 2018, he had sold all but three of his shareholdings.

Claims for Loss Relief

Henderson claimed sideways loss relief under section 64 Income Taxes Act 2007 (“ITA07”) for the losses arising from his share trading activities, considering them as deductible trading losses. However, as he couldn’t demonstrate spending more than 10 hours per week on average throughout the tax year on the activity, his sideways loss relief claims were limited to £25,000 as per section 74A ITA07.

In February 2020, HMRC issued closure notices for the disputed 2015/16, 2016/17, and 2017/18 tax years, arguing that Henderson’s activities did not amount to a trade, or if they did, the trade lacked a commercial basis, thus denying relief under section 66 ITA07. Mr Henderson appealed this decision.

Was there a trade?

The First-Tier Tribunal (“FTT”) had to assess whether Henderson’s circumstances could displace the prima facie presumption that he was not trading (as per Salt vs Chamberlain [1979] 53TC143).

The FTT analysed the number of transactions Henderson conducted during the years under appeal, which averaged slightly over one transaction per week. This pattern, with a maximum of nine trades in a week and several weeks with no trades, did not support the notion of share dealing as a trade.

Henderson spent one to two hours per day on activities related to share transactions but did not adhere to any specific work pattern. The FTT concluded that this did not align with trading activities.

Overall, the FTT determined that Henderson was not involved in a trade but rather managing a personal investment portfolio, primarily focused on growth rather than income as his main focus was the accumulation of capital growth rather than a stream of dividend income.

This pursuit of growth instead of dividend income did not make his activities a trade.

Even if the FTT’s evaluation of whether Henderson was trading was incorrect, they found that he did not conduct the activity in an organised or commercial manner, resulting in relief denial on non-commercial grounds.

As a result, the appeal was dismissed, and the loss relief was denied.

Summary

For an individual involved in share dealings, the default presumption is that they are engaged in an investment activity. This will be regardless of the level of money they hold in their investment portfolio Accordingly, any gains or losses realised from share sales typically fall under the capital gains tax provisions.

As the FTT hinted at, in order to create a trading activity, there needs to be an organised, methodical trading plan and pattern of investment activity, with the use of specialist software and numerous daily transactions, often involving the investment of third-party funds rather than sporadic transactions using your own money.

If you have any queries regarding this case or your client’s activities, please contact the advice line on 0116 243 7892 where we will be able to help.