The Capital Gains Tax (“CGT”) code is based on some pretty fundamental concepts. To apply the legislation, it’s necessary to have a clear idea of (for example) precisely what asset, if any, you have acquired or disposed of, and what expenditure, if any, you have incurred on acquiring or enhancing it.
Sometimes, even half a century after CGT was introduced, these most basic of concepts can be tricky blighters to pin down. Never more so than in transactions in real property. This is partly caused by the distinction between entering into a contract to buy land and completing it. If the contract is unconditional and is subsequently completed, the law deems the disposal and acquisition of the land to have taken place on the contract date. But in the interim, what does the purchaser own?
The problem was before the courts again in the First-tier Tribunal (“FTT”) case of Lord and Lady Lloyd-Webber [2019] UKFTT 717 (TC). They had contracted in 2007 to buy two villas in Barbados and had made stage payments totalling some $11m. Unfortunately, the villas were never completed; the contracts were terminated in 2011 and, in exchange for giving up rights under the 2007 contracts, the prospective purchasers received rights under new contracts (the value of which rights on acquisition were negligible).
The Lloyd-Webbers sought CGT relief for their loss.
HMRC had initially denied relief on the grounds that the taxpayers had never acquired any asset: what they had acquired were contractual rights under the 2007 contracts, which were not themselves assets for CGT purposes, according to the decision in the 2016 FTT case of Hardy (on which we commented here). However, that case had failed to take account of the 2009 Court of Appeal decision in Underwood [2009] STC 239 so could not stand: by the time Lloyd-Webber reached the FTT it was common ground that the contractual rights were assets.
Before the FTT, HMRC argued that the expenditure in question was not incurred in order to acquire or enhance the rights, but with a view to acquiring the land which was the ultimate subject matter of the 2007 contracts. And, since that land had never been acquired, the expenditure on it could not give rise to a loss for CGT purposes.
The Tribunal, however, preferred the analysis that “although they entered into the 2007 Contracts with the intention of ultimately acquiring completed villas, the payments made by ALW and MLW under the 2007 Contracts were for the acquisition of contractual rights, the only asset they actually acquired.” The appeal was allowed, and the CGT losses were available.
This decision is not an easy one to analyse. The Tribunal expressly accepted HMRC’s view that there is no disposal of any asset (and therefore no CGT relief) when a contract is abandoned and a deposit is forfeited; and it therefore implicitly differentiated that situation from the facts of the Lloyd-Webber case. But we do not find the basis on which the cases are differentiable easy to discern.
We hope and expect that this case will go further and that on appeal the law in this area will get its long-overdue clarification.
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This article was also published in Tax Journal Issue 1470 and is available on the Tax Journal website here.