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When does a property company become a trading company?
Published: 21 August 2026
Tax insight: Property development, SSE and SPVs
A recent First-tier Tribunal decision has provided useful guidance on a question which can have very substantial tax consequences: when is a company which owns property carrying on a trading business, rather than an investment business?
The case is Alan Pontin, Thomas Pontin, Carol Pontin and Benjamin Pontin v HMRC [2026] UKFTT 01166 (TC), decided on 13 August 2026. It is important not to overstate its authority. A First-tier Tribunal decision is not binding precedent and it could be appealed or subsequently disagreed with by a higher court. Nevertheless, the judgment is detailed, it applies principles previously established by the Upper Tribunal, and it gives a particularly useful practical example of how the distinction between trading and investment can be approached in a property development context.
The detailed facts are complicated, but the basic issue is familiar. A company owned a substantial property which had historically been held as an investment and generated rental income. The owners then decided to pursue residential development. Considerable work was undertaken to secure the development opportunity, but the property continued to produce rent while this was happening. The question was whether the company could nevertheless satisfy the statutory definition of a trading company. The Tribunal concluded that it could. For property developers, particularly those operating through groups of special purpose companies, or SPVs, that conclusion deserves attention.
Why this matters
A very common structure for property development is to have a holding company at the top of a group, with separate subsidiaries underneath it. Each subsidiary may own a separate development. One company may own a site in London, another may own a development in Manchester, and a third may be pursuing a planning opportunity elsewhere. Keeping projects in separate companies can make commercial sense because it separates financing, liabilities, investors and eventual exits. I see this frequently with international entrepreneurs and property developers establishing or expanding their businesses in the UK. An overseas developer may arrive in the UK, establish a UK holding company and then acquire each development site through a separate SPV.
What happens when one of those projects is successful? The group might sell the completed development or the underlying land. But quite often a purchaser will instead acquire the shares in the SPV which owns the project.
At that point, whether the SPV is a trading company can become extremely important. The principal reason is the substantial shareholding exemption, usually known as SSE.
Substantial shareholding exemption
SSE is a corporation tax exemption which can, broadly, allow a company to sell shares in another company without paying corporation tax on the resulting capital gain. Consider a simplified example. A holding company establishes Development Ltd and invests £1 million in acquiring and developing a site. After several years, the project has become substantially more valuable and a purchaser offers £15 million for the shares in Development Ltd.
Without an exemption, the £14 million increase in value could potentially give rise to a very substantial corporation tax liability in the holding company. If SSE applies, the gain on the sale of the shares can instead be exempt.
There are several conditions which have to be considered and SSE should never be assumed to apply merely because a group owns more than one company. Broadly, however, the selling company normally needs to have held a substantial interest, generally at least 10 per cent, for the required period, and the company being sold normally needs to satisfy the relevant trading condition. This is where Pontin becomes relevant.
Property development rarely begins with a bulldozer arriving on a site on the first day. A developer may spend several years assembling land, negotiating with local authorities, engaging architects and planning consultants, resolving environmental issues, dealing with existing tenants and pursuing planning permission. During that period, an existing building may continue to be occupied and may continue to generate rent.
If the SPV is sold during or shortly after that process, the obvious question arises: is this really a property development company, or is it still an investment company which happens to hope that it will eventually develop its property? That distinction can determine whether SSE is available.
What is a trading company?
For these purposes, the legislation does not simply ask whether the company currently has sales or trading profits. A company can undertake trading activities before its trade has formally started. Activities undertaken in preparation for a trade, and in certain circumstances activities undertaken with a view to starting a trade, can count. That is particularly important for property developers because there can be a very long preparatory period before the first development property is actually sold.
The more difficult question usually arises where the company is doing more than one thing. The statutory test broadly asks whether the company is carrying on trading activities and whether its activities include, to a substantial extent, activities which are not trading activities. That is easy to state but considerably more difficult to apply.
A company may own cash. It may receive interest. It may have an investment property alongside its trading business. A property developer may receive rent from a site while waiting for planning permission. Very few real businesses fit perfectly into one category. The practical question is therefore not whether there is any non-trading activity. It is whether the non-trading activity has become substantial.
The 20 per cent test
This is where the often-mentioned 20 per cent rule appears. HMRC guidance says that, in this context, substantial means more than 20 per cent. HMRC looks at a number of indicators, including non-trading turnover, the value of non-trading assets, expenditure and management time devoted to non-trading activities, and the history of the company.
It would be convenient if this meant that advisers could simply open a spreadsheet and determine that a company was 18 per cent investment and therefore trading, or 22 per cent investment and therefore non-trading. That is not how the test works.
HMRC itself says that the different indicators are not individual tests to which a separate 20 per cent limit should be applied. They must be weighed together and the position considered in the round. The Upper Tribunal confirmed this in Allam v HMRC [2021] UKUT 291 (TCC), an earlier and important property case considered extensively in Pontin. The assessment is both quantitative and qualitative. What matters is what the company actually does commercially and whether its non-trading activities are of real or material importance when its activities are viewed as a whole. The 20 per cent figure is therefore a useful HMRC benchmark, but it is not a statutory bright-line safe harbour.
That distinction is particularly important for property companies because rental income or the value of the property itself can produce apparently alarming percentages without necessarily telling us what the company’s real business has become.
What happened in Pontin
The company at the centre of the case, APUK, owned an 83-acre site at Henley-on-Thames. Historically, it was clearly an investment property. It contained commercial premises occupied by tenants and generated rental income.
In 2011, however, the directors decided that the future of the property lay in residential development. The accounts were changed to reflect that decision and the property was reclassified from investment property to trading stock. More importantly, the company then acted on that decision. It became heavily involved in the process required to make a major residential development possible. There was extensive work relating to the local planning framework, consultations, local councils, residents and other stakeholders. Planning professionals were engaged. Environmental, archaeological and landscape issues had to be dealt with. Existing occupation of the site had to be managed so that it would not obstruct the development.
This went on for years. At the same time, the property continued to produce rental income.
HMRC initially challenged whether there were sufficient trading activities at all. During the hearing, however, HMRC accepted that the company was carrying on activities with a view to starting a trade and that the trade was subsequently started as soon as reasonably practicable. That is an important limitation to the decision. The Tribunal did not decide precisely when the development trade itself commenced.
The remaining issue was whether the continuing investment activity was substantial enough to prevent the company from satisfying the trading company test. The Tribunal decided that it was not.
The treatment of rent
One of the most useful aspects of the case is the treatment of rental income. The company had two very different types of rental arrangement. There was an old, substantial commercial lease which had been entered into many years before the development project. The Tribunal treated the income from that lease as genuine investment income.
But there were also numerous small, short-term lettings. Those leases could generally be terminated on very short notice. They helped to cover the costs of holding the property. They reduced the business rates which would otherwise have been payable on empty premises. They also allowed the company to avoid unnecessarily removing tenants while a sensitive local planning process was continuing. The Tribunal regarded those arrangements as part of the commercial development strategy rather than as evidence of a substantial separate investment business.
For developers, this is probably one of the most practically useful parts of the judgment. Receiving rent does not automatically make a property company an investment company. What matters is why the property is being let, the terms on which it is being let and what the company is actually trying to achieve.
There is an obvious difference between a company which refurbishes a property, seeks strong tenants, negotiates long leases and tries to maximise rental yield, and a developer which grants temporary occupation pending planning permission and eventual redevelopment. Both companies receive rent. Commercially, they are doing very different things.
Intention is not enough
There is an equally important warning in the decision. Calling a property a development site does not make the company a property developer. A board resolution saying that the company intends to develop the land is useful evidence. Reclassifying the property as stock in the accounts may also be useful evidence. Neither should be expected to decide the question.
The company’s behaviour must match the stated intention. This helps explain the difference between Pontin and the earlier Allam case. In Allam, there were properties which the owners intended eventually to develop, but substantial rental and investment activity continued. The Upper Tribunal upheld the conclusion that the company had substantial non-trading activities.
In Pontin, much more had happened. The company had effectively committed itself to the development. It devoted substantial management effort to it. Professional advisers were working on it. The existing investment use was being run down rather than enhanced. New lettings were deliberately short. The major historic lease was being terminated. The way in which the property was managed had changed because of the intended development.
That distinction is highly practical. There is a point somewhere between considering development and actually becoming a development business. Pontin gives us useful evidence of what the latter can look like.
Development activity in small SPVs
Another useful feature of the judgment concerns outsourcing. Property development SPVs are often intentionally simple companies. They may have no employees at all. The architects may work for an external firm. Planning consultants may be external. Project management may be performed by the parent company. Legal, environmental and engineering work will usually be outsourced.
That does not mean the SPV itself is doing nothing. The Tribunal accepted that services bought in by the company could be taken into account when assessing its activities. What mattered was that these services were being obtained and used by the company to pursue its development project.
This is particularly relevant to international investors, family-owned groups and relatively lean development structures. The absence of a large payroll does not by itself mean the absence of a business.
Other consequences of trading status
SSE is probably the most significant application for a corporate property development group, but the distinction has wider consequences. Business Asset Disposal Relief can reduce the capital gains tax payable by an individual selling shares in their own trading company, provided the relevant conditions are satisfied. Its importance has reduced considerably because the lifetime limit is £1 million and qualifying gains are taxed at 18 per cent for disposals from 6 April 2026. Nevertheless, it can still produce a meaningful tax saving for owner-managed businesses.
Gift hold-over relief is potentially important when ownership is being transferred rather than sold. For example, a parent may want to transfer shares in a family trading company to children. Where the statutory conditions are satisfied, the immediate capital gain can effectively be deferred rather than creating a tax charge at the time of the gift. For family succession planning, this can be extremely valuable.
Business Property Relief, generally now referred to in the legislation and HMRC guidance as Business Relief, can be even more significant because it concerns inheritance tax. Ordinarily, valuable shares owned by an individual form part of their estate for inheritance tax purposes when they die. Shares in a qualifying business can obtain Business Relief, potentially removing all or part of their value from the amount exposed to inheritance tax.
Under the rules applying from 6 April 2026, qualifying business and agricultural property can generally obtain 100 per cent relief within a combined £2.5 million allowance. Qualifying value above that allowance generally receives 50 per cent relief. Unused allowance can potentially be transferred between spouses or civil partners, allowing a combined allowance of up to £5 million in appropriate circumstances. For a family property company worth several million pounds, the difference can therefore be substantial. Suppose a founder owns a valuable property development company and dies while still holding the shares. If the business qualifies for Business Relief, the inheritance tax result can be radically different from that for a company whose business is principally holding investment properties and collecting rents.
The precise statutory Business Relief test is not the same as the trading company test considered in Pontin. In particular, inheritance tax legislation asks whether the business consists wholly or mainly of certain excluded activities, including making or holding investments. It would therefore be wrong simply to assume that success under Pontin guarantees Business Relief. Nevertheless, the practical distinction is closely related. Is this genuinely a business which develops and deals with property, or is it fundamentally an investment business which owns property and derives income from holding it? For families whose wealth is concentrated in property companies, that distinction can have major inheritance tax consequences.
Practical steps
The most useful response to Pontin is not to restructure every development group. It is to recognise that trading status should be managed and documented during the life of the project rather than investigated for the first time shortly before a sale. Where an investment property is moving into development, the directors should be able to demonstrate when and why that commercial change occurred.
Board minutes should record substantive decisions rather than merely use tax terminology. The accounting treatment should reflect the commercial position. Contracts with planners, architects, engineers and other advisers should be retained. Development expenditure should be identifiable. Planning applications, negotiations and other project activity should be documented.
Existing leases should be reviewed. If the commercial intention is redevelopment, granting a new ten-year lease purely to maximise rental income may tell a very different story from permitting short-term occupation which can be terminated when development starts.
Management time also matters. Groups should have some ability to explain what directors and senior staff were actually doing, particularly where they work across several companies. The company’s financing and use of cash may also be relevant.
None of these factors is decisive by itself. Together, however, they create the factual picture on which the tax analysis will ultimately depend.
Limits of the decision
There is a danger of reading Pontin too aggressively. The case does not say that every investment property becomes trading property as soon as the owner decides that development might produce a higher return. Nor does it say that rental income is irrelevant. Nor does it establish that obtaining planning permission automatically constitutes a property development trade.
The outcome depended on unusually detailed evidence showing a genuine and sustained transition from investment activity towards development. That is precisely why the case is useful. It shows that the tax analysis should follow commercial reality.
At one end of the spectrum is a landlord holding property for rental income while keeping open the possibility that it might one day be developed. At the other is a developer which is actively pursuing planning, reorganising occupation, committing management resources and expenditure, engaging professional advisers and preparing the property for redevelopment and sale. The difficult cases lie between those two extremes.
Pontin, read alongside the Upper Tribunal decision in Allam, provides some practical guidance as to where the dividing line may lie. For property development groups using separate SPVs, that question should be considered well before an exit is contemplated. It can affect whether the sale of a development company benefits from SSE, whether relief is available when shares are transferred within a family, the tax payable when an owner sells their business and, potentially, the inheritance tax treatment of a family property business.
The broader lesson is straightforward. Trading status is not created by a label and it is not determined by a single percentage. It emerges from what the company actually does. For developers, making sure that the corporate records, contractual arrangements and management of the property reflect that commercial reality can ultimately be worth a great deal.
With warm regards
Dmitry Zapol
Partner, international tax advisor, ADIT (Affiliate)
IFS Consultants, London
(www.ifsconsultants.com, dmitry@ifsconsultants.com)