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Hardy case: bad law? CGT and forfeited deposits

The Upper Tribunal decision in Hardy [2016] UKUT 0332 (TC) is one which is at the same time unsurprising to most tax professionals and astonishing to the layman.  The facts were simple.  Mr Hardy contracted to buy a flat off-plan, paying a deposit of £72,000.  When the time came to complete the purchase, he wasn’t able to do so and under the terms of the contract he lost his deposit.  He claimed that for the purposes of CGT he had made an allowable loss of £72,000 which he sought to offset against other capital gains.

Mr Hardy had argued unsuccessfully before the First-tier Tribunal that on entering into the contract he had acquired beneficial ownership of the flat, which was an asset: and that when the vendor rescinded the contract he had disposed of that asset at a loss.  Before the Upper Tribunal he put a subtly different argument: that on entering into the contract he had acquired not a beneficial interest in the flat but valuable contractual rights (principally the right to require the flat to be transferred on payment of the purchase price).  That argument was also rejected by the Upper Tribunal.  The “valuable contractual rights” and the “beneficial interest in the property” were really nothing more than two ways of describing the same thing.  The Upper Tribunal, like the First-tier Tribunal, relied heavily on Jerome v Kelly [2004] UKHL 25 and its detailed analysis of TCGA 1992 s28 and, like the First-tier Tribunal, concluded that “when a seller and a buyer enter into a contract for the sale of land, the seller does not dispose of an asset and the buyer does not acquire an asset”.  Of course, if and when the contract is completed, the disposal is normally treated by s28 as taking place on the date of the contract: but if the contract is never completed (as was the case for Mr Hardy) there is simply no disposal and no acquisition.

A layman who comes across this case may be bemused.  He might vaguely recall having heard it said somewhere that CGT is supposed to be a tax on real gains which makes allowance for real losses (actually by Lord Wilberforce in Aberdeen Construction Group [1978] AC 885).  And he might wonder whether the denial of loss relief to a man who manifestly made a genuine and painful loss of £72,000 of real money sits well with pronouncements of HMRC and others of the desirability of paying “the right amount of tax”.

A tax professional will be less bemused: the law is what it is and it sometimes leads to odd results. But he might then reflect on what would have happened if Mr Hardy had assigned his rights under the contract (assuming them to be assignable).  We now know that the rights are not assets for CGT purposes (because HMRC and two Tribunals have just told us so).  It must necessarily follow that any profit on an assignment of such rights would not arise from the disposal of an asset and would not be chargeable to CGT.  Granted that in many circumstances a profit on assignment of rights may be subject to Income Tax as arising from an adventure in the nature of trade, or possibly even as a land transaction within the scope of the current Finance Bill provisions: but this will not always be the case.  And where it isn’t, the logic that cooked Mr Hardy’s goose will also be fatal to HMRC’s gander.

David Whiscombe

Consultant

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