Forfeited deposits: simpler than you thought?

/ 22 February 2022

Andrew Levene

The First-tier Tribunal (‘FTT’) has handed down its decision in Drake [2022] UKFTT 25 (TC).  The facts are simple.  Mr Drake contracted to buy a property ‘off plan’.  He paid £220,000 by way of reservation fee and deposit, with a further stage payment of £110,000 to be paid 12 months later and the balance on completion.

The market moved against Mr Drake.  He failed to make the stage payment, the seller treated the contract as repudiated, and Mr Drake’s reservation fee and deposit were forfeited.

Mr Drake claimed he had made a loss for Capital Gains Tax (‘CGT’) purposes and sought relief accordingly.

Tax law says that abandoning an option is not (subject to exceptions not relevant here) a disposal.  It also says that a forfeited deposit of purchase money is treated for tax purposes in the same way as the premium for a call option that is not exercised.  So you might think that the answer to Mr Drake’s claim to tax relief was obvious: you can’t have it.

When this sort of thing has been before the courts before it has left something of a trail of confusion behind it.  In Hardy [2016] UKUT 0332 (TCC), the Upper Tribunal (‘UT’) held that the rights of a purchaser under an uncompleted contract weren’t an asset for CGT purposes; and that even if they were, forfeiture wasn’t a disposal; and even if they were and it was, any loss wasn’t allowable.  Subsequently, in Lloyd-Webber [2019] UKFTT 717 (TC) it was common ground between the parties that the Hardy decision was per incuriam (lawyer-speak for ‘wrongly decided’) because it hadn’t taken account of an earlier case of Underwood [2009] STC 239.

So to Mr Drake’s case.  The FTT reviewed the case law and concluded that Hardy wasn’t per incuriam after all, and (as a UT decision) was binding on the FTT.

However, although bound by the rehabilitated decision in Hardy, the FTT did opine that if it had not been bound, it would have said that a purchaser’s rights are an asset for CGT purposes.  But it would have agreed with Hardy that the forfeiture wasn’t a disposal, for the reasons we outlined at the start of this piece.

Moral: sometimes things are after all as straightforward as they appear to be.

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Our articles on the older cases mentioned above:

Andrew Levene

Director of Property Taxes

T +44 (0)20 8922 9394
E andrew.levene@bkl.co.uk

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