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November 21, 2016
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Capital Gains Tax and Lost Deposits

In Anthony Hardy v HMRC, the First-Tier Tribunal found that a loss of deposits due to the failure to complete the contracts on the purchase of property did not amount to a disposal for capital gains tax purposes.

Background

  • Mr Hardy entered into two contracts for the construction and sale of two properties
  • Two deposits amounting to £56,000 and £72,000 were made for the properties on the exchange of the contracts
  • The funds were not available to complete either purchase and the sellers rescinded both contracts and retained the deposits.
  • In the course of seeking to raise funds, Mr Hardy realised capital gains on two other properties, against which Mr Hardy sought to offset the loss of the two deposits

The Case

Mr Hardy made two points of argument:

  1. That he acquired the beneficial ownership of the properties on the exchange of contracts, or alternatively
  2. That he acquired the beneficial ownership of the properties on the construction of the properties

Mr Hardy contended that on the rescission of the contracts he involuntarily disposed of his beneficial ownership, and a loss was made equal to the value of the lost deposits.
For both arguments, he submitted that a purchaser of property acquired an equitable interest in it from the point of contract onwards, the seller holding the legal title as trustee for the buyer.

In response, HMRC argued that the acquisition of the properties would have occurred on completion of the contracts. There was no evidence that Mr Hardy had any beneficial interest in the property.

The tribunal agreed with HMRC, and concluded that it would be wrong to treat an uncompleted contract for the sale of land as equivalent to an immediate, irrevocable declaration of trust (or assignment of beneficial interest) in the land. Up until the point of completion, the seller is entitled to enjoyment of the land or its rental income.

Therefore, it was held that neither the exchange of contracts, nor the satisfaction of the condition of construction of the houses marked an acquisition of assets by Mr Hardy. On this basis, the rescission of the contracts did not mark a disposal of assets on which a gain or a loss could be realised.

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