Share Transactions by Individuals
Transactions by individuals in shares and securities are not generally trading transactions. Such transactions normally fall within the charge to Capital Gains Tax. This is also true of transactions in futures, options or other derivative contracts.
Case law that should be considered in these circumstances:
Pennycuick J considered whether an individual was trading in Lewis Emanuel & Son Ltd v White [1965] 42TC369 where he said at page 377:
“ The word ‘speculation’ is not, I think, as a matter of language, an accurate antithesis either to the word ‘trade’ or to the word ‘investment’: either a trade or investment may be speculative. On the other hand, it is certainly true, at any rate in the case of an individual, that he may carry out a whole range of financial activities which do not amount to a trade but which could equally not be described as an investment, even upon a short-term basis. These activities include betting and gambling in the narrow sense. They also include, it seems to me, all sorts of Stock Exchange transactions. For want of a better phrase, I will describe this class of activities as gambling transactions...”
Pennycuick did not accept that an individual speculating on the price movement in shares without intending to hold the shares even as short term investments was trading. He considered that such transactions are analogous to gambling, and so fall short of trading.
The question of whether an individual is trading is a question of fact. And if agreement cannot be reached, an issue for the Commissioners to decide. It is therefore essential that we ascertain all the facts related to your specific circumstances before making any decisions or changes to your strategy, because tax cases provide some useful pointers, but each case is dependent on its own facts. It is therefore vital to establish the facts first of all.
The decided cases make it very clear that there is no definitive checklist for determining whether an individual is trading or not. The “badges of trade” are only a guide. The presence of one, two or more of them is not conclusive which really doesn’t help you establish the best way to pay your taxes!
Derivatives Transactions by Individuals
Individuals sometimes contend that options and futures are different to shares, because they are not income producing assets unlike shares which produce dividends, and they are usually dealt in by way of trade. However, financial futures and options are contracts closely tied to movement in prices of shares, interest rates or share indices. They are often used in exactly the same way as shares. It is therefore important to establish the facts when an individual contends that he or she is trading in derivatives. So, as for transactions in shares and securities, the question is whether the individual has organised his or her activities in a way that amounts to trading or is simply speculating on price movements.
Derivative traders do not simply enter into contracts and await price movements, such traders operate in exactly the same way as stock market traders. They trade by turning over the assets in large volumes at a dealing margin. They buy and sell to those customers of the market who want to use the derivatives. Like share dealers, they will hedge against market movement so that their exposure to it is kept within strict limits. So, in determining whether an individual is trading in futures, options or contracts for differences, the factors which need to be considered are essentially the same as those for an individual trading in shares.
Some of the derivative exchanges, including LIFFE, have now largely abandoned floor trading in favour of a screen based trading system, where prices are displayed and contracts can be made electronically. Some former LIFFE ‘locals’ now deal in derivatives in this way. They should still be considered to be trading given their background and involvement in the derivatives market, if there has not been a significant change in the nature of the activities. In cases where there has been a significant change in the nature of their activities, then a decision should be reached on the basis of the facts of the case.
When all the facts have been gathered in a particular case it should be possible to conclude whether or not there is a trade. However, if once you have established the facts, there are doubts or difficulty, which cannot be resolved locally, you should refer the case to Business Tax (Technical) following ADM 6.109.
