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Taxpayer loses CGT appeal on forefited £212,000 property depost
iStock_coldsnowstorm_Flats under construction

Forfeited deposit was not an allowable loss

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Picking through a thicket of previous decisions, the first tier tribunal ruled that a taxpayer did not realise an allowable loss for CGT purposes equal to the lost deposit on a property lease.

20th May 2022
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In July 2014, Christopher Drake entered into a contract for a plot at a property in London, which was under construction at the time of the contract.

On the date of the contract, Drake paid a deposit of £215,000, equal to 20% of a premium of £2.2m less a reservation fee.

However, Drake defaulted on the 10% stage payment, due one year later. The seller treated this as a repudiation of the contract and kept the deposit. The contract never completed.

Drake would have been entitled to assign the benefit of the contract, had he paid the deposit and stage payment.

Disallowed expense

Drake claimed an allowable loss in his 2015/16 tax return in respect of the deposit.

In November 2018, HMRC issued a closure notice to disallow the loss, resulting in additional tax payable of over £60,000. This led to the appeal before the first tier tribunal (FTT) [TC 08377/V].

The issue in the appeal was whether Drake had an allowable capital gains tax (CGT) loss equal to his lost deposit.

Other case law

This appeal required the FTT to consider decisions reached in previous cases.

Notably, this appeal had many similarities to that of Hardy, which reached the upper tribunal (UT) – and so the decision of which was potentially binding on the FTT.

In Hardy, a taxpayer agreed to purchase an off-plan leasehold property, paying 10% of the purchase price on entering the contract. The benefit of the contract was not assignable. The taxpayer was unable to complete and the seller exercised its right to rescind the contract and keep the deposit.

Although the UT in Hardy noted that contractual rights are capable of being an asset for CGT purposes, it dismissed the appeal, as the UT did not consider that rights under a contract to acquire land were assets for CGT purposes.

Two other cases were relevant to this appeal.

In Lloyd-Webber, the FTT did not accept the argument in Hardy that the rights under the taxpayers’ original contracts were not assets for CGT purposes, and ultimately allowed the taxpayers’ appeal.

The third case – Underwood – reached the Court of Appeal, and pre-dated Hardy. In brief summary, the court decided that where a taxpayer has two contracts with the same person (B), one to sell and the other to repurchase the same piece of land, and settles those contracts by payment of the net excess of the repurchase price over the sale price, no allowable loss for CGT purposes arises to the taxpayer on the sale to B, as there is no disposal of the land to B.

Issue

The issue in Drake’s appeal was whether, on rescission of the contract, a loss arose on the disposal of an asset (the loss being equal to his “acquisition cost” in that asset).

Drake argued that the facts of his case were analogous to those in Lloyd-Webber, and that the FTT should follow the decision of the FTT in Lloyd-Webber and allow his appeal.

HMRC, on the other hand, relied on Hardy, arguing that there was no disposal of a capital gains asset on the facts of this case.

Decision

Ultimately, the FTT found that the Underwood decision could co-exist alongside Hardy, and that the UT’s decision in Hardy was binding on the FTT.

Drake’s appeal was dismissed on the basis that the rescission of the contract, by reason of the repudiatory breach, did not constitute a disposal of an asset for CGT purposes.

Alternate basis

Even if the FTT was wrong in its conclusions around Hardy (and indeed the FTT did give its reservations on the UT’s conclusion that rights under a contract to acquire land are not assets for capital gains tax purposes), it would still have dismissed Drake’s appeal.

The FTT noted that a forfeited deposit of purchase money did not constitute the disposal of a CGT asset, when considering s144(7) TCGA read together with s144(4), and this was sufficient to dismiss the appeal.

This was also one of the conclusions reached in Hardy, and was discussed in Lloyd-Webber (although the issue wasn’t specifically applicable to that case).

Replies (1)

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paddle steamer
By DJKL
24th May 2022 09:25

If the individual was trading in property would the cost of the deposit likely have been an allowable cost for income tax?

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