Capital Gains and Deposit

[DonkeyAccountant]

Mr A entered into a contract to purchase a property at a specified price. He was required to pay a 25% deposit and pay the balance at a later date.

He did put a 25% deposit. However, for some reason, he never paid the 75% balance. The property developer decided to forfeit the 25% deposit in return for not pursuing him for the 75% balance.

The sales transaction was never completed and he never legally owned the property. How should we account for the transaction for income tax and capital gains purposes?

Can we claim capital loss on the 25 % deposit?

Can we treat the contract as a "forward contract" and treat the loss of the 25% deposit as a miscellaneous income loss (Case VI income) and set it against other miscellaneous income arising in the same tax year?

Is it correct that the forfeiture of a deposit is not treated as a disposal for capital gains purposes?

[mullet]

In simple terms this is a tax nothing. It is not an income loss because it is not income. And it is not a capital loss because there has not been the acquisition or disposal of an asset.

Was it an option? Even if it was, then a loss arising on the abandonment of an option is an allowable capital loss only if the asset was acquired for the purposes of a trade carried out by him. Section 144(4) TCGA 1992:

(4)The abandonment of—
(a)a quoted option to subscribe for shares in a company, or
(b)a traded option or financial option, or
(c)an option to acquire assets exercisable by a person intending to use them, if acquired, for the purpose of a trade carried on by him,
shall constitute the disposal of an asset (namely of the option); but the abandonment of any other option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person.

[mullet]

Sorry, missed a word which makes my response a sweeping statement.

Even if it was, then a loss arising on the abandonment of such an option
Otherwise it looks as though I am saying that the abandonment of an option will never give rise to an allowable capital loss.

[maths]

A deposit which is forfeited does not constitute a disposal for CGT purposes; hence no possible chargeable gain or alowable capital loss.

It is very unlikely to be an option; if it was and it was not exercised it would not be possible for "The property developer decided to forfeit the 25% deposit in return for not pursuing him for the 75% balance" as you indicated.

[section 44]

Agreed that there has been no actual disposal but what about a capital sum derived from an asset (s22 TCGA)?

The property developer decided to forfeit the 25% deposit in return for not pursuing him for the 75% balance.

s22(1)(c) ?

[maths]

The property developer decided to forfeit the 25% deposit in return for not pursuing him for the 75% balance.

I think that it should have read :

"Mr A decided to forfeit the 25% deposit in return for [the property developer} not pursuing him [Mr A] for the 75% balance".

Under a normal contract for the sale of a property a failure to "complete" by either party gives the other party the right for specific performance; rescind the contract etc. but not recovery of the deposit if the person placing the deposit (ie the purchaser) fails to complete.

In the present case the buyer, Mr A having failed to proceed with the purchase gives, prima facie, the right to the developer to force Mr A to proceed. However, it would seem that the developer decided to simply not proceed (I would suggest already having the right to retain the deposit). If this is correct then the developer received no "capital sum" in return for a forfeiture of his rights and thus
s22(1)(c) would not apply; to this extent I think the quote provided by DonkeyAccountant (my or his version) is perhaps misleading.

However, we do not of course have full details of the precise terms of the contract between the two parties.