Mr and Mrs Griffiths rented out 11 properties, mainly furnished to students and other short term occupiers. They provided various amenities and services, and spent much of their spare time collecting rents, finding new tenants, inspecting properties and ironing out problems. Vinelott J in the High Court found that this did not amount to a trade. He said:
“I may perhaps be permitted to add that I am not without sympathy for the taxpayers. It is a peculiar feature of United Kingdom tax law that the activity of letting furnished flats or rooms, while it may be a business and, in this case, a demanding and time-consuming business, is not a trade. Formerly the principle operated in favour of the taxpayer, whose liability to tax on the proceeds of exploitation of his proprietary rights was exhausted by the Schedule A assessment. Now the proceeds of letting are taxable under Schedule A and the rule operates to the disadvantage of the taxpayer; his income is not earned income and he is not entitled to capital allowances and to the rollover relief for capital gains tax purposes afforded to a person carrying on a trade. The business may, as in this case, occupy much of the taxpayer’s free time or even be one which required his whole time attention. The taxpayer may put as much or more work into his business as, for instance, someone whose business consists in arranging licences to fix vending machines on the property of others and who daily or at less frequent intervals collects the proceeds and replenishes the machines. It is not too easy to see why in the modern world a business consisting of the exploitation of the right of property in land should be treated differently from a business consisting of the exploitation of other assets. However, the principle is now too deeply embedded in the law to be altered except by legislation.”
The distinction between a trade and a business is important because there are significant differences in the tax treatment of the disposal of a trade and of an investment asset, including eligibility for certain capital gains tax reliefs and business property relief for inheritance tax. As summarised by Vinelott J, passive ownership of rental properties, though a business, does not amount to a trade. Broadly speaking, ‘dealing’ in property is a trade, whereas ‘investing’ in property is not. The distinction between the two can be a distinctly murky twilight zone.