In Lady Lloyd-Webber and Lord Lloyd-Webber v HMRC [2019] TC7488, the First Tier Tribunal allowed relief for payments on a failed off-plan villa purchase. There was a disposal of contractual rights and the capital losses were allowable.
Under s38 TCGA 1992, on the disposal of an asset, an individual may deduct:
- the amount of any expenditure wholly and exclusively incurred on the acquisition of the asset or for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal.
In 2007 the Lloyd-Webbers who were UK tax resident at all material times, entered into contracts to purchase two off-plan villas in Barbados, paying over $5m by way of deposits plus stage payments of nearly $6m.
- Construction was originally due to complete by 30 June 2009 but work ceased in February 2009 due to financial difficulties of the developer. At the time of the hearing the properties remained incomplete and were derelict.
- In 2011 the Lloyd-Webbers terminated their 2007 contracts and signed new contracts which they considered to be of negligible value. They claimed capital losses of $3,124,311 each in their 2011/12 tax returns after deducting the nil value of the rights under the 2011 contracts. Some of the losses were offset against gains made in 2013/14.
- HMRC enquired into the losses and issued closure notices disallowing them in full.
- The question was whether the amounts paid were to acquire/enhance their contractual rights or to acquire/enhance estates in the land which were the subject matter of the contracts.
The FTT allowed the appeal:
- For the purposes of s38 it was necessary, taking an objective approach, to consider what the payments made by the Lloyd-Webbers were for.
- The judge concluded they were to acquire the 2007 contractual rights, being the only asset they actually acquired, and not the completed villas. There was a disposal of these rights in 2011 and the losses were allowable.
- Under s43 TCGA had the project completed, the amounts paid (for the contractual rights) would have able to have been treated as expenditure on the land, as, in such circumstances there has been either a “merger” or “change in nature” of the contractual rights.
- Had Parliament considered that a loss in circumstances such as these should be excluded from relief provision it could have put that in the legislation as it did in the case of losses resulting from a forfeited deposit. Such provision had not been made.
The judge said that this was a "real world approach" consistent with the TCGA. He also advised that the Lloyd-Webbers may apply to the tribunal for HMRC to pay their costs, although they had not specifically requested this. It is possible that HMRC may decide to appeal the decision.
Links to our guides:
CGT: deductible expenditure (susbscribers)
Date of acquisition or disposal for CGT (susbscribers)
How to calculate a capital gain or loss
External link:
Lady Lloyd-Webber and Lord Lloyd-Webber v HMRC [2019] TC7488