In Christopher Drake v HMRC  TC08377, the First Tier Tribunal (FTT) found that a deposit lost on the acquisition of a lease that did not complete did not result in an allowable loss for Capital Gains Tax (CGT) purposes.
- In July 2014, Mr Drake entered into a contract, which, in return for payment of a premium of £2.2 million, entitled him at contractual completion to be granted the lease of a property that was being constructed.
- At the date of the contract, Mr Drake paid a deposit of £215,000. A £5,000 reservation fee had previously been paid.
- A ‘stage payment’ of 10% of the £2.2m premium was payable 12 months later, with the balance due on completion.
- Mr Drake was entitled to assign the benefit of the contract after payment of the deposit and stage payment.
- The stage payment, due in July 2015, was not paid by Mr Drake owing to difficulty raising finance. This meant that the seller treated Mr Drake as having repudiated the contract.
- The contract was never completed and the seller kept the deposit.
- Mr Drake’s 2015-16 tax return claimed a Capital loss on the forfeited deposit, which HMRC disallowed.
- This disallowed loss was upheld by HMRC on Statutory review.
- Mr Drake appealed to the First Tier Tribunal (FTT).
In order for a capital loss to have accrued to Mr Drake, it was necessary for there to have been the disposal of an asset resulting from his breach of the contract due to non-payment of the stage payment.
The FTT considered earlier case law, including the Upper Tribunal (UT) decision of Anthony Hardy v HMRC  UKUT 0332. This UT decision was found to be binding on the FTT in this case.
- In Hardy it was found that no allowable capital loss arises where a deposit for the acquisition of a property is lost due to the taxpayer defaulting on their obligations to make the full payment at completion, resulting in the acquisition contract being rescinded.
- The buyer's loss of the right to enforce the performance of the contract, resulting in loss of their deposit, does not amount to a disposal for CGT purposes.
- The primary difference between Hardy and this case was that in Hardy the benefit of the contract was not assignable in any circumstances. This did not distinguish Hardy from this case as:
- Hardy considered the issue of assignability and concluded it was not a significant factor.
- Mr Drake never paid the stage payment, hence the contract never became assignable.
The FTT found that in accordance with the decision in Hardy, Mr Drake’s repudiatory breach which resulted in the rescission of the contract did not constitute a disposal of an asset for CGT purposes, meaning that no capital loss arose.
Useful guides on this topic
CGT: Deductible expenditure
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How to calculate a capital gain or loss
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CGT: Date of acquisition or disposal
When is the date of acquisition or disposal of an asset for Capital Gains Tax (CGT) purposes? When do special rules apply? Why does it matter?
Statutory Review (by HMRC)
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