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Tax on Compensation

How to treat compensation on a failed land sale.

Hello fellow accountants!

First of all, thank you for taking the time to look at this post.

I have a question regarding compensation for a failed property deal.

I have a client who was going to sell some land he personally owns overseas however the deal didn’t go through but they were given £20,000 in compensation for the deal not going through and messing them around.

The client is adamant that the £20,000 isn’t taxable because they paid £100,000 for the land originally and as they haven’t sold the land there is no profit. I have tried to explain that as they haven’t exchanged an asset for the £20,000 it’s a receipt that should be taxed in the current period. They think it should be held over until the land is sold!

I have spoken to another accountant and he agrees that it is taxable in the year it is received but thought it should be taxed under income tax and not capital gains!

I have never had this crop up before and am struggling to find any references or examples that I can give to the client that explains the situation. The only thing I can find is on business compensation or personal injury compensation. Which is the reason for my post, I am hoping that maybe someone here has had a similar situation or could suggest some references I could look at.

Many thanks

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19th Jan 2018 14:11

Congratulations! Your question has won an award for having the lowest fact to content ratio ever. Your prize is a blue smartie inserted in an orifice of your choice, or I could choose one for you.

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19th Jan 2018 15:10

AS PNL suggests you really need to be more precise about the facts and circumstances under which it was agreed that your client had suffered a loss or damage (or some other injury) and should be compensated for that by a payment of £20,000

Having established that it may then be useful, as a starting point, to look at the HMRC guidance at CG12700 to 12900, and perhaps CG1303P, and return to the forum, or take specialist advice, if you are still not sure about the tax treatment.

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By Ruddles
19th Jan 2018 15:15

Zim? Maybe yes. Maybe no.

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By 4biz
19th Jan 2018 16:01

Seriously PNL why would you bother!

Do you not think if there was more to go on I would provide it but the basic facts are they got £20k because the buyer went back on his word and didn't buy the land. I know this is an unusual situation but I was just interested if anyone else had any experience like this that they could share.

Thanks Michael I will have a look at those.

Thanks anyway

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By DJKL
to 4biz
19th Jan 2018 16:25

But, why was it paid?

Was the prospective buyer in breach of contract, was there something in the legal documentation giving rise to this payment, was it a forfeited deposit, how exactly did this transfer of £20,000 come to pass and why?

Going back on one's word is pretty meaningless re land transactions, certainly in Scotland contracts for land could only be proved by writ or by the oath of the other party (who is going to volunteer that yes, there was a contact, just not in writing, here is £20k), or certainly that was the case in 1984-1985 when I passed my business law exams at university.

You need to put some meat on the bone to get any sort of meaningful response.

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By DJKL
to DJKL
19th Jan 2018 16:32

p.s. It possibly has the makings of an interesting question so do give us all a bit more information, I have 45 minutes to kill avoiding vat returns before I have to go and do the cooking and I detest vat returns.

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By DJKL
to DJKL
19th Jan 2018 16:36

As a start does individual hold the land as stock or in what capacity is it held, what about residence position,was there a contract?

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By Ruddles
to 4biz
19th Jan 2018 16:29

Only having the basic facts is no excuse for posting a half-baked question and expecting a meaningful reply.

Get off your backside and ask for, and provide, the details if you really want some help here. I've had experience of property owners receiving compensation for aborted sales, but whether that experience is at all relevant to your client's circumstances I have absolutely no idea.

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19th Jan 2018 16:35

The other accountant may have thought it was liable to income tax for a reason. They may not have. That's the first issue for me.

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By 4biz
19th Jan 2018 17:12

Again if there was more to go on I would provide it but there isn't, all I was after was a pointer in the right direction so I could find the answers myself...funnily enough after most of these unhelpful answers (thanks to those who did try to help), I have rung HMRC again and after getting passed around as people didn't know the answer managed to speak to an inspector who had dealt with a similar case and based on the same information I posted here he managed to point me in the right direction!

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to 4biz
19th Jan 2018 17:13

You could give him your blue smartie.

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By DJKL
to 4biz
19th Jan 2018 17:44

Well, impressed that someone from HMRC could deduce the treatment from the limited facts given.

Next step is obviously to try similar in the tax jurisdiction where the land is, to get their take on how the matter ought to be treated vis a vis any liability in their jurisdiction.

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