In Anthony Hardy v HMRC (2015) TC04444, a taxpayer failed to claim Capital Gains Tax (CGT) loss relief on a lost property deposit.  This decision has since been confirmed by the Upper Tribunal.

Mr Hardy entered into a contract to purchase a plot of land from a developer and paid a 10% deposit of £128,000.

  • The balance of the purchase price was payable upon the condition that a house was constructed on the land.
  • Following completion of construction, Mr Hardy did not have the funds to fulfil the contractual payment. The contract was cancelled, and Mr Hardy lost his £128,000 deposit.
  • He claimed a capital loss on his tax return. HMRC opened an enquiry and denied the claim, citing the fact that no disposal had taken place.

First Tier Tribunal (FTT)

  • Mr Hardy argued that s28 TCGA 1992 provides that where an asset is acquired under a contract, the acquisition or disposal occurs at the time the contract is made, not when the asset is delivered.
  • He therefore acquired the property when he paid the deposit and signed the contract. This then reverted to the vendor when the contract was cancelled.
  • HMRC in contrast stated that s28 provides clarity over the timing of an acquisition or disposal, and is not the disposal itself. In Mr Hardy’s case, there was neither an acquisition nor disposal and so there was no occasion of loss.

The Tribunal agreed with HMRC, citing Jerome v Kelly [2004] STC 887 which specifically considered s28 and its meaning.

Upper Tribunal (UT)

Mr Hardy was refused permission by the FTT and UT to appeal on the same grounds.  However, he was eventually given permission to appeal on new grounds.  His new arguments were that:

  • When he entered into the contract, he acquired valuable rights which were themselves an asset.
  • When the vendor rescinded the contract, those rights were extinguished and therefore disposed of, resulting in an allowable capital loss.
HMRC  rejected this for three reasons:
  • Firstly, he did not acquire an asset.
  • Secondly, even if he did, he didn't dispose of that asset.
  • Thirdly, even if he did the foreited deposit was not an allowable loss.

The UT agreed with HMRC on all three grounds, finding that:

  • When a seller and buyer enter into a contract and the buyer fails to complete there is no disposal or acquisition of an asset.
  • The buyer's loss of the right to enforce performance of the contract, resulting in loss of their deposit, does not amount to a disposal.
  • The deposit was not paid wholly or even mainly for the acquisition of contractual rights, but was rather a prepayment for the property. This means that, in any event, the loss would not be allowable. UPDATE: it has since been determined by the court that this was incorrect and it therefore cannot be relied on in future cases.

Comment

The decisions in this case confirm the well-established principle that lost deposits are not allowable for CGT purposes.

Very harsh for the unfortunate Mr Hardy: perhaps it would be wise to insure against such losses in similar cases.

Useful guides on this topc

CGT: Residential property - signpost
How are income and gains from UK residential property taxed?  What taxes do I need to think about for UK residential property?

CGT: date of acquisition or disposal
When is the date of acquisition or disposal of an asset for Capital Gains Tax purposes? When do special rules apply? Why does it matter?

CGT: deductible expenditure
What expenditure is allowable for Capital Gains Tax (CGT)? What about loan interest, early redemption fees etc?

Property & letting: CGT and IHT issues (subscriber guide)
This note concerns unincorporated businesses which consist of ordinary property letting (furnished or unfurnished). It also looks at Furnished Holiday letting.

External links

Cases:

First Tier Tribunal: Anthony Hardy v HMRC (2015) TC04444

Upper Tribunal: Anthony Hardy v HMRC [2016] UKUT 0332


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