Before the 2008 Budget
For most share speculators, there were no significant differences between share trader and share investor status. Share trader status allowed more expenses to be offset, while share investor status allowed taper relief and the annual exemption to reduce tax liability. Given that many share speculators held shares for only a short period, this often meant that both share investors and share traders were subject to a tax rate of 40% (assuming they were higher-rate taxpayers).
There were also genuine long-term share investors who benefited from lower CGT rates due to taper relief. Depending on the length of time the shares were held, the effective CGT rate could drop to 24% or even 10% for investments such as AIM shares.
Changes After April 2008
The abolition of taper relief and the introduction of a flat 18% Capital Gains Tax (CGT) rate changed the landscape significantly. Share investors generally gained a significant tax advantage over share traders, as the reduction in the tax rate outweighed the benefits of additional expense relief available to traders.
Current Tax Environment (Post-2023)
Since the 2008 changes, CGT rates have been updated further. The flat 18% rate has been replaced with a tiered system:
- For higher-rate taxpayers, CGT is now 20% on most assets and 28% for certain assets, such as residential property and carried interest.
- Basic-rate taxpayers pay 10% (or 18% for residential property) on gains exceeding their annual allowance.
Tax Treatment for Share Traders
Although the tax treatment of share traders is less favorable than before, it still offers some advantages, particularly in how losses are treated. Share traders can offset losses against other income, including employment, interest, or trading income, rather than merely carrying forward losses to offset future capital gains. This can result in tax refunds if deductions at source (e.g., PAYE or interest tax) have been made.
However, HMRC continues to scrutinize claims of share trader status, often relying on the badges of trade to determine whether an individual is engaged in trading or investing.
Badges of Trade and HMRC Scrutiny
HMRC uses the following factors to assess whether share transactions constitute trading activity:
- Motive of the Taxpayer
- The taxpayer’s intent in buying and selling shares is a key consideration. If the primary motive is profit realization, HMRC may classify the activity as trading.
- However, HMRC does not rely solely on the taxpayer’s stated intent. Instead, they analyze the facts of the transaction.
- Patterns and Frequency of Transactions
- Regular and systematic buying and selling of shares, especially over a short time, suggests trading. HMRC looks for evidence of continuous and habitual activity.
- Infrequent or sporadic transactions are more likely to be classified as investing.
- Nature of Transactions
- The length of time the shares are held. Short-term holdings are more indicative of trading.
- Whether the proceeds from sales are reinvested in purchasing more shares.
- The origin of the shares (e.g., inherited vs. purchased). Shares acquired through inheritance are less likely to indicate trading.
- The reason for selling the shares (e.g., emergency needs vs. speculative motives).
- Whether the purchase was financed through loans or credit, as this can indicate speculative intent.
Shares are generally presumed to be held as investment assets unless there is clear evidence of trading activity. Judicial decisions have upheld that speculative share dealings are not inherently classified as trading unless supported by exceptional circumstances.
Impact on AIM Investors
The removal of taper relief significantly impacted some AIM investors, especially those who relied on the reduced effective CGT rates. However, AIM shares continue to qualify for inheritance tax relief under Business Relief after two years of ownership, maintaining their attractiveness for estate planning.
Future HMRC Focus
The significant tax advantages of share investor status, such as the lower CGT rates, indicate that HMRC will likely pay closer attention to frequent traders who attempt to claim investment status. Similarly, individuals claiming trader status to offset losses will also face increased scrutiny.
Will You Be Classified as a Share Trader?
The determination of trading status depends on the badges of trade and the overall pattern of activity. If your share dealings are frequent, short-term, and systematic, you may be classified as a trader. However, if your activity aligns more with long-term investing and occasional transactions, you are more likely to be treated as an investor.
