In Gordon Lim v HMRC [2019] TC07158 the FTT held no deduction could be claimed for forfeited property deposits and payments for breach of contract; the taxpayer had not incurred the costs as part of his property dealing trade.
Revenue expenditure in a trader's accounts is disallowed for tax if it is not "wholly and exclusively" incurred for the purpose of the business.
Mr Lim’s son and daughter in law had contracted to purchase two residential building plots and paid 10% deposits.
- They could not complete the purchases due to ill-health causing mortgage difficulties and forfeited the deposits.
- They were also sued for breach of contract, having to pay £122,213 to the vendor which Mr Lim funded.
- Mr Lim had previously entered into transactions for 8 ‘off plan’ properties. Three were aborted by 2012 and there had been significant delays in the construction and completion of plots in Florida and Spain so he had not made any sales. He also owned 4 rental properties.
- Mr Lim said that the beneficial interest in the properties was held for him in bare trust by his son and daughter in law; there was no contemporaneous documentary evidence of this.
- He said he was trading in property and claimed the £122,213 losses as a deduction in his self-assessment return. As part of his case he also claimed a deduction for the forfeited 10% deposits.
- HMRC did not challenge that Mr Lim was trading in property as part of their enquiries though they did as part of their stated case. They issued a closure notice on the basis that the costs were not expended by the appellant as part of his trade; the expenditure had been incurred by his son and daughter in law rather than the appellant.
The FTT dismissed the appeal.
- Whilst the judge disagreed with HMRC’s view that there was no trade as there was no property to sell, finding that the contract for the purchase of the plots could have been held in trust for Mr Lim, there was no evidence the contract had been held in trust.
- Mr Lim had not discharged the burden of proof to show that he was the beneficial owner of the contracts; the properties were therefore not part of his property dealings and the ownership remained with his son and daughter in law.
- The 59.5% penalty for deliberate behaviour and a prompted disclosure was upheld.
Links to our guides:
Wholly and exclusively…toolkit
Losses, trade losses and sideways relief
Penalties: Errors in Returns and Documents
Profits from dealing in or developing UK land
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