Capital Gains Tax on Incomplete Contract

by **Pink Bird** on Thu Nov 19, 2009 7:40 pm

Hi,

My brother has paid his girlfriend £330,000 such that she can pay off her mortgage. They have drawn up a contract whereby if he pays her £350,000 (half the property value) he will have a half share in the property. However he cannot afford to complete this contract currently and I am concerned that his girlfriend may be liable for capital gains tax on this sum as a result.
Can anyone let me know what the situation is re. tax on the £330k???

Many thanks, Pinky

by **AvocadoK** on Thu Nov 19, 2009 7:54 pm

Hi
Is the house the girlfriend's main residence? If so, CGT isn't going to be an issue.

Generally, CGT is triggered on the making of a contract or agreement, and not on completion. Having said that, if the contract is never completed, there can be no disposal for CGT purposes.

AK

by **Pink Bird** on Thu Nov 19, 2009 9:26 pm

Hi.....it is his girlsfriend's main residence - so that sounds hopeful - thank you!

Pinky

by **mullet** on Fri Nov 20, 2009 8:08 am

Generally, CGT is triggered on the making of a contract or agreement, and not on completion.

It is actually the other way round. CGT can only be due where a chargeable asset (or part of an asset) is sold or otherwise disposed of by a chargeable person - and if that disposal is a chargeable occasion. There can be no CGT until the asset has actually been transferred or conveyed, but CGT legislation sets the date of disposal as the contract date. So in the case of a contract that has not yet been fulfilled, there has not yet been a disposal for CGT purposes.

As the other respondent said, the g/f will have no liability if this is her only or main residence.

by **AvocadoK** on Fri Nov 20, 2009 8:09 pm

msp,
The time of disposal for CGT purposes is is determined by s28 TCGA:

"Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred)."

In the query, it appears that the contract has been made, but not completed. The making of the contract triggers a CG disposal.

AK

by **mullet** on Fri Nov 20, 2009 8:44 pm

I maintain that if a contract has been made but not completed, then there has not yet been a disposal for CGT purposes. Yes, Section 28 TCGA 1992 sets the date of disposal for CG purposes, but if the asset has not been transferred then there is no disposal.

The word "disposal" is not defined in 1992 so it is given its ordinary meaning - a sale, exchange or gift is a disposal. The "sale" of land (in fact of any asset) does not take place until the agreed consideration has been paid and the asset has been transferred - by deed for land and property and perhaps physically for most other assets.

Sorry for being pedantic. :ugeek:

by **AvocadoK** on Fri Nov 20, 2009 10:22 pm

No need to apologise for pedantry - pretty much essential for tax people!

I agree with you that the 'disposal' will not be a 'disposal' if it is never completed (as I said in my first post). Section 28 just dictates when the disposal will take place. But how long do you wait before seeing whether completion takes place ? For practical purposes, you would generally work on the basis that completion WILL take place at some point, and self assess the disposal according to when the contract is made.

EG say it is now 31/1/2010 and the date of contract was 5 April 2009 and you have not yet completed but expect to do so in the future . You are filing your 2009/09 tax return on the latest possible filing date. Do you report the disposal? I would say yes - would you?

Regards

AK

by **mullet** on Fri Nov 20, 2009 10:37 pm

AvocadoK wrote:No need to apologise for pedantry - pretty much essential for tax people!

You should see me on my quest to educate the world on the correct use of apostrophes!

AvocadoK wrote:EG say it is now 31/1/2010 and the date of contract was 5 April 2009 and you have not yet completed but expect to do so in the future . You are filing your 2009/09 tax return on the latest possible filing date. Do you report the disposal? I would say yes - would you?

A very interesting point, and one that I have pondered in the past. In strictness you don't report the gain in the 2008-09 return, since you still own the asset - you could ignore the contract and sell the asset to someone else for a different amount, or not sell it at all. OK, you would incur the wrath of (and possibly face action for breach from) the original purchaser, but it is possible. Once the contract had completed and the asset had been transferred, you would give notice of amendment to the return to include the disposal.

What if completion was beyond the statutory amendment date? Then you would have to advise HMRC of the facts and disposal date, which would constitute a discovery by HMRC (one definition being "finds out"). They would then act on that discovery by issuing an assessment for 2008-09. That is one of the oddities of the CGT legislation when it conflicts with the self assessment regime.

by **maths** on Sun Nov 22, 2009 8:09 pm

I find myself in disagreement with both AvocadoK and msp re the principles involved.

For CGT it is beneficial and not legal interests which trigger CGT charges on asset disposal.

Re land (not involving conditional contracts) a transfer of beneficial interest occurs at the time of so-called "exchange" of contracts not "completion". Thus if A exchanges contracts with B (under which B is purchasing from A) then a CGT liability is precipitated at this point (on the part of A) irrespective as to whether "completion" occurs or not.

Following the contract exchange, pursuant to which the beneficial interest is transferred to B (in my example above), A holds the legal interest in trust for B.

The subsequent conveyance of the legal title to B is not necessary to precipitate a CGT liability; B can at any point demand that A perform the contract under the rule of specific performance pursuant to which the legal title is transferred.

Pre the inroduction of SDLT, avoidance of stamp duty was avoided by land transactions "resting on contract" but this did not preclude a CT charge.

Re the query raised, if a contract has been prepared in writing and duly signed by both parties then in principle a beneficial interest has been transferred by the girlfriend and a CGT liability precipitated (as a principle private residence of the girlfriend any capital gain is, however, exempt). The brother owes 350,000; if he has paid 330,000 then of course he owes the balancing 20,000 but this makes no difference to the principles. The girlfriend, were CGT to be leviable, would based on 350,000 not 330,000.

by **mullet** on Mon Nov 23, 2009 10:21 pm

Mmm, this is getting interesting. I'm in that uncomfortable situation where I think that I'm right until someone proves me wrong. In the back of my mind is something about a contract creating an equitable interest over the land, but I can't remember exactly where that fits in.

Even though contracts may have been exchanged, if purchaser 1 can't or won't hand over the money and breaches the contract then the seller is free to retain the deposit (and possibly sue for damages in our wonderfully litigious society) and sell to purchaser 2. That to me demonstrates that purchaser 1 had an interest in the property after contract, but not beneficial ownership as such.

I suspect it's all in the Law of Property Act 1925, which is not light bedtime reading.