BIM60060 - Land: Supervening trade

Although we may accept that land was acquired as a capital asset or as an investment the facts may suggest that it was subsequently developed or dealt with in such a way that it became stock of a newly set up trade or adventure in the nature of trade. This is the concept of supervening trade.

There is judicial support for this concept in dicta in Taylor v Good [1974] 49TC277 (at p.287), Lionel Simmons Properties Ltd v CIR [1980] (53TC461), at p.491, and Page v Lowther [1983] (57TC199), at p.217.

Worthwhile cases should be pursued where it is possible to identify a clear change of intention with regard to the land. That intention must normally find physical expression. An example might involve the demolition of a warehouse previously held as a capital asset and the construction for sale of residential flats. It is once again a question of fact and degree. The greater the change in character of the land, the stronger the supervening trading argument becomes.

The change of intention will involve an appropriation of the capital asset to trading stock when the trading activity begins and there will therefore be a deemed disposal at that moment for Capital Gains Tax purposes under TCGA92/S161. The determination of that moment is entirely a question of fact. You should therefore ensure that you examine the history of the project in sufficient detail to be able to identify and, if necessary, to argue for the appropriate date. This date will of course have implications both for the valuation of the land and the expenditure that is allowable as a trade expense (or even as pre-trading expenditure under ICTA88/S401).

All cases involving supervening trading should be submitted to Business Tax (Technical) before listing for a contentious hearing.