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Independent Investor Engaged in ‘Trade’ for Tax Purposes Tribunal Rules

In a ruling of interest to investors and tax professionals, a tribunal has decided that a man whose independent stock market dealings made him millions, before his luck turned bad, was trading on a commercial basis and is thus entitled to set off his losses against his profits for Income Tax purposes.

After leaving full-time education, the man had devoted himself full-time to investing in stocks and shares, working from his home. Starting out with a modest loan from his father, his dealing became ever more sophisticated and he had hopes of establishing his own hedge fund. Described as extremely disciplined, hard-working and focused, he consistently made profits for over a decade, in some years running into millions of pounds. As markets became more volatile, however, his golden touch deserted him and he began making crushing losses, in one year over £4.6 million.

He applied to HM Revenue and Customs (HMRC) to set off the losses that he made in that disastrous year against profits that he had achieved in previous years. HMRC took the view, however, that he was in the same position as any ordinary private investor. He was not trading on a commercial basis for profit, and was therefore not entitled to the relief sought under Section 66 of the Income Tax Act 2007.

In upholding his appeal against that ruling, however, the First-tier Tribunal found that his investment activity bore all the badges of trade. The period over which he had been investing in the markets, the size and frequency of his transactions and his complete reliance on financial trading for his own and his family’s livelihood were all highly indicative of trade.

His engagement in a deliberate and organised scheme, designed to achieve profits, was sufficient to remove him from the norm of private investors. The fact that he may in the end have become over-confident, or fallen prey to infallibility syndrome, did not mean that he was trading other than on a commercial basis for profit.

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