Property income or trading income?

The distinction between dealing or developing property (trading income) and investing in property (property income) is sometimes a difficult one to make. The categorisation is important as a trader is subject to national insurance on trading profits, whereas national insurance is not payable on property income.

It may be clear cut as to whether a  person is dealing or investing: someone buying property to let out long term is  likely to be making an investment; someone buying a property to refurbish and  sell is likely to be trading. However, in many other cases the answer is not so  obvious.

The first place to start is to consider  the 'badges of trade' and apply them to your client's situation. The badges of  trade are not a statutory concept, but have been developed through case law to  identify when a person is undertaking a trading activity. A summary of the  badges of trade is given in the Badges of trade guidance note.

The application of the badges of trade  in relation to property is considered in the Property investment or trading?  guidance note.

The rest of this guidance note considers  the situation where the person has an investment in property and is therefore  subject to income tax on property income.

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