Capital Gains Tax on Incomplete Contract

[AvocadoK]

Hi,

I have a client who owned some land in which he sold it to a developer to build houses on. The deal was that he would receive one of the houses in exchange for the land.

The contract was dated August 2004 and they took ownership of the house in 2008. When did the capital gain arise 2004 or 2008?

Hi Dan
Presumably when you say 'they took ownership of the house' you mean that's when the contract finally completed. Assuming this to be the case, the date of contract determines when the gain is assessable - i.e. 2004/05.
Regards
AK
PS - Hopefully not too controversial, everyone?

[davetr]

Thanks AK,

Thats was my thinking also. Unfortunatley I have only just recently taken this client on and his previous accountant doesn't appear to have accounted for the gain in his 2005 tax return.

Dan

[wamstax]

Can I just add my tuppence worth and a possible other matter to consider re the contract 2004 and 2008 - Could the land disposal contract be a conditional one if there was any condition included in the contract that the developer required to obtain planning permission. The contract would not be treated as an unconditional one until the planning permission was obtained. Equally the contract should be scoured for other "interest" mitigating features.

With apologies to anyone who might have suggested likelwise but just looked at last posting while chewing on my morning toast

[Incredulum]

As for the OP, a better view (IMO anyway) is that the chargeable gain arose when the contract became unconditional - i.e. on exchange. However, as the contract never completed, s48 TCGA provides relief "if any part of the consideration subsequently proves to be irrecoverable, there shall be made, on a claim being made to that effect, such adjustment..."

As for the other question, the disposal was in 2004. Consideration was deferred, but presumably not contingent. It is therefore not discounted, but is based on a valuation of the right to receive the property when it is received.

If contingent - on PP, say, then Marren v Ingles applies.

It might be possible to apply for the tax to be payable in instalments under s280, though I have no idea whether a single instalment, four years later, constitutes consideration being paid by instalments.

[maths]

Unless there are unusual terms in the contract (and we have no reason to believe this to be the case) the contract will not be a conditional contract for CGT purposes.

Even were the contract to contain a condition (assuming it to be a condition precedent ) the disposal for CGT would not be at date of exchange but at the date the condition is satisfied.

The failure to complete prevents a CGT disposal occurring and thus section 48 is not in point (see the cases I referred to above in particular Underwood).

[Incredulum]

The failure to complete prevents a CGT disposal occurring and thus section 48 is not in point (see the cases I referred to above in particular Underwood).

I think you do have the better view, but certainly s48 provides us with belt and braces (as if PPR relief were not enough) as we probably need to see the contract to be certain exactly what is giong on here - surely nobody would give away 330k without gaining anything in return...

It's interesting, though, isn't it, how it is accepted that exchange gives rise to a chargeable event, but failure to complete reverses the situation.

Clearly completion is contingent on passing sufficient consideration; sufficient consideration is not passed, therefore the contract does not happen. Perhpas exchange of contracts does not ever give rise to a chargeable disposal.

[wamstax]

Exchange (unconditional) merely fixes the time for the disposal if there is in fact a chargeable occasion however all the things previously recited in your discussions determines the overriding requirement for their to be a chargeable disposal. Well that is my handle on matters as regards the exchange of contracts relevance.