Kirkham v Williams [1991] STC 342

Facts

  • Mr. Williams, a building contractor, purchased land near his home, initially intending to use it for the storage of building materials.
  • He subsequently built a house on the land and moved in with his family, using it as their residence.
  • Several years later, Mr. Williams sold the house and land at a profit.
  • The Inland Revenue asserted that the gain from the sale constituted trading income, alleging that Mr. Williams had acquired the land with the intention to develop and sell it for profit.

Issues

  1. Whether Mr. Williams' purchase and use of the land constituted a trade for tax purposes.
  2. Whether a profit motive was present at the time of acquisition or development, justifying the classification of the gain as trading income.
  3. How to distinguish between personal use, investment, and trading activities in the context of asset acquisition and sale for tax assessment.

Decision

  • The High Court found in favour of Mr. Williams.
  • Justice Vinelott held that Mr. Williams purchased the land primarily for personal reasons (storage and as a family home), not as part of a trading activity.
  • The generation of profit upon sale did not, by itself, classify the transaction as a trade.
  • The court determined that profit intention relevant for "trade" must exist at the time of acquisition or development, not solely at the point of sale.
  • The Revenue failed to demonstrate that Mr. Williams' intention was to make a profit from trading when acquiring or developing the property.

Legal Principles

  • The intention to make a profit must be established at the time of acquiring or developing the asset for the transaction to qualify as trading.
  • Personal or investment motives at acquisition, without a clear trading strategy, negate classification as a trade, even if a profit is realised on subsequent sale.
  • Change in intention during ownership can impact classification, but the original motive prevails unless clear evidence of a shift to trading intent is shown.
  • The case distinguishes trading activity from investment and personal use, reinforcing that each transaction must be assessed on its unique facts.

Conclusion

Kirkham v Williams confirms that the primary motive and intention at the time of acquiring an asset are decisive in determining whether a transaction constitutes trading for tax purposes; a personal or residential motive at the outset, resulting in a profit on eventual sale, does not render the gain trading income.

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