Two sisters inherited a property development business when their father passed away. They continued this business as a partnership renovating and developing properties to sell on at profit. One of the sisters wants to buy one of the properties for herself. She is to pay market value but the partnership will make a loss due to the cost of the improvement. Could this loss be claimed as a trading loss of the partnership with each partner claiming loss relief accordingly?
As this business is a trading activity and not a property rental business the properties will be shown in trading stock in the accounts. Trading stock is “trading stock in relation to a trade means anything (whether land or other property) which is sold in the ordinary course of trade.”
If a loss is generated from the sale of trade stock on the open market, then trading loss reliefs would apply and a claim could be made to set the loss off against general income.
However, as one of the sisters wants to buy the property for herself the goods for own use rules would come into effect and the commerciality of the loss needs to be considered.
ITTOIA 2005 s172B applies where the trading stock is appropriated by the trader. The legislation confirms that when calculating the profits of that trade the market value at the time of the appropriation is brought into account as a receipt. This is irrespective of any cash consideration paid. Therefore, the partnership would treat the appropriation by one of the partners as a sale at market value.
The commerciality of the loss must then be considered. How has a loss been generated? Was the cost of improvement excessive simply due to the fact that a partner in the business knew she would acquire the property for personal use? Was there use of more expensive materials used to renovate and furnish the property?
If a claim for trade loss relief is made by the partners following the appropriation, then there is a potential restriction to the claim unless it can be shown that the trade is commercial. ITA 2007 s66 imposes the restriction if the trade is not carried on on a commercial basis and with a view to the realisation of profit.