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Capital gains on new build sold before completion

CGT on exchange of contracts before completion

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I have a client who has signed contracts with a building company a few years ago for a new build property currently being built.  The agreed price was £200k and he put down a £20k deposit to secure it.  

They have not completed the sale yet as they only complete after the property has been built and ready for use.  The building company have now offered to take back the property from him, giving him back his deposit plus an extra £50k.  

I assume normal capital gains tax will apply in this instance or is there anything specific i need to be aware of.  Technically he has never owned the property as they never completed, he only secured it with signed contracts.  Now he has this offer he is going to take it up and run with the money. 

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By chicken farmer
13th Jan 2020 10:48

I suggest that he is making a disposal of his rights under the contract (not a disposal of the property itself) so, on basic principles, he has a capital gain of £50K.

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Hallerud at Easter
By DJKL
13th Jan 2020 11:21

Few things you do not mention which might colour answers are:

1. Has he done this often/before?
2. What does he do for a living?
3. What was his intention with the property in question when he paid the deposit?

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Replying to DJKL:
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By Accountant A
13th Jan 2020 11:56

DJKL wrote:

Few things you do not mention which might colour answers are:

1. Has he done this often/before?
2. What does he do for a living?
3. What was his intention with the property in question when he paid the deposit?

Ah yes, facts! Always useful in determining the tax treatment! Glad someone understands that.

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By fawltybasil2575
13th Jan 2020 13:56

@ cabriochris19 (OP).

I believe that your question comes into the category of not simply the requirement to answer the question which the client asks, but the wider requirement to act in the client’s interests.

Probably (albeit not certainly) implicit in your question is that the builders (whether due to underestimating the costs of building the property and/or the market value of the property when built; or the increase in property values on the site over the unspecified number of year since the deposit was made; or whatever) now believe that the £200,000 agreed price should with hindsight have been £250,000. If so, then a decision to “cut and run” with the £50,000 (which would very probably be subject to tax in one form or other) should be measured against the alternative of rejecting the builders’ offer (which would result in that same £50,000 being potentially a CGT-free gain in the future, if the property was intended to be purchased as a PPR).

In addition, however, one must ask whether the £50,000 is indeed a true “underestimate” referred to above. It may be that say £75,000 (or an even higher figure) is a truer reflection of the underestimate, and that the builders are hoping that their £50,000 offer will be accepted, to their own benefit.

Overall, one has to delve more deeply into the (clearly “out of the ordinary”) offer. Is perhaps the property one of a site development of say 12 properties ? - if so, have enquiries been addressed, by the client, to any of the purchasers of the other 11 properties, to see whether they have received similar offers from the builders ?

One could comment further – suffice to say that, where unusual circumstances arise, as in this case, one should take a step back, and consider the wider picture, and make further enquiries.

Basil.

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By cabriochris19
14th Jan 2020 09:22

Thanks for your replies. I found out a bit more background information.

The client is an IT manager, he is not a property investor and has no relationship with the building company.
His intention was the purchase the flat to live in as a family home so this deal is not a trade he is carrying out.
He believes all the new owners have been offered the same kind of deal but does not know why this is and doesn't have any further details of this. He believes the property was offered to him at the correct market value originally.
The flat will not be finished until the end of 2021 and therefore he will take the deal offered and purchase a new property which is ready to move into immediately.

So it seems CGT is payable as normal but I understand about the wider considerations so thanks for your insight.

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