Capital Gains Tax – Allowable loss – Sale of land – Forfeited deposit – Appellant agreeing to purchase flat and paying deposit – Appellant failing to complete and forfeiting deposit – Whether contractual rights in respect of property constituting chargeable asset for capital gains tax purposes – Whether appellant disposing of chargeable asset – Whether forfeit of deposit amounting to allowable loss – Appeal dismissed
The appellant entered into a contract for the off-plan purchase of a leasehold property situated in a development at the former Queen Mary Hospital, Roehampton Lane, Roehampton, SW15. The purchase price was £720,000 and a deposit of 10% of the purchase price (i.e. £72,000) was required to be paid on the date of the contract. The appellant needed to sell two other properties (the existing properties) in order to complete on the purchase but was unable to do so by the completion date. When the appellant was unable to complete, the vendor exercised its right to rescind the contract and keep the deposit. The existing properties were sold later in the same tax year, giving rise to capital gains.
The appellant filed a self-assessment return for the year declaring the gains on the existing properties and seeking to set the loss he had suffered through forfeiture of the deposit against those capital gains. An enquiry was opened by the respondents and a closure notice issued, disallowing the appellant’s claim to capital losses. The appellant appealed unsuccessfully to the First-tier Tribunal which concluded that neither the exchange of contracts, nor the satisfaction of the condition as to construction of the houses, marked the acquisition of assets because the transactions intended never took place; accordingly, the rescission of the contracts did not mark a disposal of assets on which either a gain or a loss could be realised. The loss of the deposits could not have been a loss capable of being allowed against chargeable gains in the same year: see [2015] UKFTT 250 (TC).
The appellant appealed to the Upper Tribunal contending that, when he entered into the contract, he acquired valuable contractual rights, which constituted an asset, and when the vendor rescinded the contract, those contractual rights were extinguished and disposed of, resulting in a loss in the amount of the forfeited deposit. The respondents contended that that argument was flawed because: (i) the appellant had not acquired an asset; (ii) even if he had, he did not dispose of that asset; and (iii) even if he had, the forfeited deposit did not constitute an allowable loss.
Held: The appeal was dismissed.
(1) Since contractual rights were capable of being an asset for capital gains tax purposes, it was necessary to analyse carefully the contractual rights which the appellant acquired when he entered into the contract. What the appellant acquired was primarily the right, subject to compliance with his own obligations, to compel performance of the vendor’s obligations under the contract, and in particular to obtain specific performance of the vendor’s obligation to convey legal title to the property to him. That was a valuable right but it did not necessarily follow that it was an asset for the purposes of the capital gains tax. When a seller and a buyer entered into a contract for the sale of land, the seller did not dispose of an asset and the buyer did not acquire an asset. The asset, which was the land, was disposed of by the seller and acquired by the buyer when completion took place, albeit that section 28(1) of the Taxation of Chargeable Gains Act 1992 would then deem the date of the transfer to be the date of the contract. It made no difference to the analysis whether one considered the buyer’s contractual right to obtain specific performance of the contract or the buyer’s beneficial ownership of the land. They were two sides of the same coin, and both were contingent upon the buyer’s compliance with the buyer’s own obligations. If the buyer failed to complete, there was no disposal or acquisition of the asset. It followed that the First-tier Tribunal was correct to conclude that the appellant did not acquire an asset for capital gains tax purposes when he entered into the contract. He therefore had no asset to dispose of when the contract was rescinded: Jerome v Kelly [2004] UKHL 25; [2004] 1 WLR 1409 applied.
(2) It followed that the second and third issues did not arise. However, had it been necessary to do so, the court would have concluded that the combined effect of section 144(7) and section 144(4) of the 1992 Act, in a case such as the present, was that the buyer’s loss of the right to enforce performance of the contract of sale, resulting in forfeiture of the deposit, did not amount to a disposal.
(3) Furthermore, the deposit had not been paid wholly or even mainly by the appellant for the acquisition of contractual rights under the contract, but as a part-payment of the purchase price of the property. The acquisition of the right to enforce performance of the contract was incidental. Accordingly, the forfeited deposit was not in any event an allowable loss.
Rory Mullan (instructed by direct access) appeared for the appellant; Kate Balmer (instructed by the Solicitor to HM Revenue and Customs) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Hardy v Commissioners for HM Revenue and Customs
