On 1 May 2008 Simon House purchased a derelict freehold house for ￡127,000. Legal fees of

￡1,800 were paid in respect of the purchase.

Simon then renovated the house at a cost of ￡50,600, with the renovation being completed on 10 August 2008. He immediately put the house up for sale, and it was sold on 31 August 2008 for ￡260,000. Legal fees of ￡2,600 were paid in respect of the sale.

Simon fi nanced the transaction by a bank loan of ￡150,000 that was taken out on 1 May 2008 at an annual interest rate of 6%. The bank loan was repaid on 31 August 2008.

Simon had no other income or capital gains for the tax year 2008–09 except as indicated above.

Simon has been advised that whether or not he is treated as carrying on a trade will be determined according to the six following ‘badges of trade’:

(1) Subject matter of the transaction.

(2) Length of ownership.

(3) Frequency of similar transactions.

(4) Work done on the property.

(5) Circumstances responsible for the realisation.

(6) Motive.

Required:

(a) Briefl y explain the meaning of each of the six ‘badges of trade’ listed in the question.

Note: You are not expected to quote from decided cases. (3 marks)

(b) Calculate Simon House’s income tax liability and his Class 2 and Class 4 national insurance contributions for the tax year 2008–09, if he is treated as carrying on a trade in respect of the disposal of the freehold house.(8 marks)

(c) Calculate Simon House’s capital gains tax liability for the tax year 2008–09, if he is not treated as carrying on a trade in respect of the disposal of the freehold house. (4 marks)