The costs are clearly capital in nature, but no asset has been acquired and so there is no disposal of an asset that may create a capital loss.
S144(7) TCGA 1992 states that section shall apply to a forfeited deposit of purchase money and consequently such a loss is not treated as the disposal of an asset.
Capital gains tax and corporation tax on chargeable gains are taxes on chargeable gains accruing on the disposal of chargeable assets. Assets are loosely defined as ‘all forms of property’ (TCGA 1992, s. 21). It goes without saying if there is no underlying asset then the associated costs are non-deductible under S38 TCTA 1992.
There have been a number of cases considering this issue:
Underwood v R & C Commrs [2009] BTC 26,
The taxpayer entered into a contract to sell land which stood at a £1m loss with an option to purchase it back for the current value plus 10% of any future increase in value. The property did increase in value, and the taxpayer entered into an agreement to sell it to a company that he controlled (Brickfields Ltd) for £600,000. The problem was that the taxpayer simply paid the difference to the purchaser. There was no actual disposal under the contract nor was the option exercised to reacquire the property.
Anthony Hardy v HMRC (2015) TC04444
Mr Hardy and his wife entered into a contract for the off plan purchase of a leasehold property and a deposit 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. The Upper Tribunal rejected the argument that entering into a contract meant that valuable rights had been acquired that could be regarded as a separate asset from the land.
Lloyd-Webber & Anor [2019] TC 07488
The taxpayers entered into contracts to purchase two villas in a development in Barbados. A deposit was paid, with the balance payable in stages subject to completion certificates. In consequence of the financial crisis, the vendors were unable to finish construction of the villas. Subsequently, new contracts were entered into with the vendors which they gave up any rights under the 2007 contracts but obtained rights to recover some monies if sales of the villas were ultimately achieved. In their 2011–12 tax returns, each claimed losses more than £3m on the basis that the 2011 contracts that were received in consideration for the disposal of the 2007 contracts had negligible value at the date of acquisition.
Interestingly, the FTT revealed that HMRC had accepted that the Upper Tribunal’s decision in Hardy v HMRC had been wrongly decided. The FTT concluded that, although the taxpayers entered the 2007 contracts with the intention of acquiring completed villas, they acquired only the contractual rights. These rights, the only assets acquired, constituted distinct assets which were later disposed of when the 2011 contracts were entered into, and the losses generated on that disposal were allowable for CGT purposes. This interpretation was not followed in the decision in Drake below.
The FTT judge determined that the decision in Underwood did not render the decision in Hardy per incuriam and so not binding. Therefore, the FTT judge followed the decision in Hardy and denied the loss being claimed but did add:
‘I am not persuaded that Hardy was correct to say … that rights under a contract to acquire land are not assets for capital gains tax purposes … However, it is not necessary to reach a firm conclusion on this point because, even if they are, it is clear that a forfeited deposit of purchase money does not constitute the disposal of a capital gains asset: see s144(7) read together with s144(4).’
Therefore, it is still unclear whether rights under a contract are assets for capital gains purposes but s144(7) TCGA 1992 tells us that the forfeit of a deposit is not a disposal of an asset for capital gains purposes.
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