New prospect exchanged contracts on a property owned by him and used in his sole trader business. Before completion he received a much larger offer. The original buyer agreed to release him from the contract on payment of 90% of the sum due. He has now contracted with the 2nd buyer and received a payment equal to 3 times what he paid the 1st buyer
My thoughts are:-
Entrepreneurs relief on the 1st deal (still thinking abouit that ) and full CGT on the 2nd. Anybody got a disagreement with my analysis
I'm happy there's no mony laundering involved even though it seems weird
Replies (31)
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What did the first buyer actually get for his money? The second buyer seems like a fairly straightforward capital gain matter, the first is the complicated bit.
If the first deal did not complete then there is no disposal of the property at that stage, despite having exchanged contracts.
Not sure how you treat the payment to the first buyer, i.e. is it enhancement expenditure?
Sale to second buyer is the one to worry about CGT upon, if I understand what you're saying.
Not sure how you treat the payment to the first buyer.
I think this is the point of interest (though, like Wanderer, I'm a little befuddled by the OP). From memory, the aborted sale may be governed by one of the 144 sections (possibly even s144 itself) - but possibly only from the (aborted) purchase point of view.
The payment may be a tax nothing, from the prospect's viewpoint. But you'd want to work through it all to make sure; that means a fee for possibly no return for the client.
Tax work can be an awkward cuss sometimes.
My immediate thought was - no disposal (re the 1st deal) so no 1st deal to worry about. The 90% payment I would imagine to be treated as compensation for breach of contract. Taxable for the abortive purchaser? I don't know. Allowable for the vendor? "Expenditure wholly and exclusively incurred in establishing, preserving or defending his title ..."?
"Payments awarded for breaches of contract are subject to scrutiny using the “Gourley principle.” According to Hui Ling McCarthy of Gray's Inn Tax Chambers, this means: “That a person must not be placed in a better or worse position as a result of a breach of contract than if the contract had actually been performed.” Therefore, the payment awarded is the amount the person would have received net of tax and is not subject to further tax."
Was the 90% net of the tax due probably not, but that's the first buyers issue not the seller I guess.
However was the seller worse off as a result? No. If he then receives 3x the original offer, id say he wasn't worse off.
You are talking about an award of damages made by court or other authority. It appears that here we are talking about a sum agreed by the two parties, so the Gourley principle is not in point.
Even if it were, it applies to the recipient and the receipt, for whom (as the principle says) the money is supposed to be fair recompense.
Bernard's concern is the payer and the payment.
I realise that, i was just looking at the other side of the equation, but i take the point that it doesnt apply to this case either way.
i was just looking at the other side of the equation.
Curiously, I don't think it's an equation. At least in the sense that the mirror tax treatment you might expect may well not apply - my gut feel is a tax charge for the recipient and no tax relief for the payer.
Fair enough, it was pulled from the net without much thought as to whether it applied in this case.
I don't understand your analysis.Entrepreneurs relief on the 1st deal (still thinking abouit that ) and full CGT on the 2nd. Anybody got a disagreement with my analysis
I'm reading your description of the 1st deal as that your client paid out 90% of the original deal price. So what is there to claim entrepreneurs relief on?
I don't understand your analysis.
I'm reading your description of the 1st deal as that your client paid out 90% of the original deal price. So what is there to claim entrepreneurs relief on?
Phew! Not just me then? Thought I was going mad.
Lack of detail here. Reading into the OP's analysis could it be:-
Deal 1, sale, unconditional contract etc.
Deal 1a, purchase (at 90%).
Deal 2 sale.
Probably a good, detailed, read of the paperwork required to establish exactly how deal 1a was constructed.
"However there are more strings to this than the prospect originally told me" - how unusual.
I agree that something doesn't smell right - why would one pay what appears to be an OTT price for a property occupied at a peppercorn rent compared to a much smaller sum for vacant possession? Someone must know something that no-one else involved does.
Weirdest reverse premium I've ever seen, and it raises another (tax... I'm staying out of the "you what?"s) question: does the granting of a lease at 7 years' peppercorn rent constitute additional consideration?
Bernard, I hope your fee has a per-string element!
I wouldn't have thought so (re additional consideration). If anything, the purchaser/ lessor might need to consider whether the deemed premium provisions apply (eg CG70825)
I would think if I sold you my £100,000 house on the terms that you would pay me £50,000 in cash upfront and let me continue to live there for £50 pa for 10 years, then (the value of) the bit after the "and" would be just as much consideration as the bit before it. (I confess this, and everything else I've said in this thread, is gut-feel not head-knowledge, and it may simply be wrong.)
What's weird about Bernard's case is that the upfront part the buyer has apparently offered is equivalent to £300,000. But the "and" is still there.
Possibly - we're back to discussions about transactions/arrangements and conditionality, sale & leaseback provisions etc. Can't be bothered to go through it all.
Sounds like you're coming to the denouement of Cabin Pressure, MJN Airways & the wiring in Gertie... but that's by the by.
The 90% seems to be compensation for backing out of contract 1, but I wonder whether that will actually be allowable enhancement cost against contract 2. Somewhere at the back of my mind there's a case (fairly recent) that says that it will not be enhancement expenditure, but I cannot immediately dredge it up.
I don't think it can be argued to be enhancement expenditure, but I'm wondering, as above, whether it would fall under the establishment etc of title. Perhaps the case you're thinking of (I think I know the one you're talking about but cannot remember the name) addressed that point as well.
EDIT - found it: Blackwell [2017] BTC 9
Although there are some similarities there are, I think, significant differences. But we don't know all of the facts of this case so I'll end there.
There's probably even more strings which the ''prospect'' will come up with if the responses to what has so far been provided are unfavourable.
Did you not think to ask for the full details at the outset ?