Is a Deposit on an Off-plan Flat an “Asset” for Capital Gains Tax?
It may sound like rather a dry question but, in practice, it’s very important. If you make a speculative investment and put down a deposit for a property under construction, but then cannot come up with the balance to complete, and that means you lose the deposit (and the right to complete), is it something you can write-off for CGT purposes against other gains? Just as importantly, if you pay the deposit and then successfully sell on the contractual right to complete at a profit, are you taxable on that gain?
This issue was examined in a recent decision in the Upper Tier Tribunal for tax cases, Hardy v HMRC  UKUT 332. In that case, Mr Hardy had contracted to buy an off-plan, buy-to-let property and was expecting to be able to sell two other investment properties to fund the purchase. In the market downturn of 2008-9 however, he was not able to sell his existing properties in time, and the transaction fell through. He claimed to off-set his loss of the off-plan deposit against gains made when the existing properties were finally sold, later in the same tax year, but HMRC disagreed.
He lost. The conclusion of the Upper Tier Tribunal was that, when a person enters into a contract to purchase a property and pays a deposit, although they may have rights under the contract, they are not acquiring an asset at that time, and that means they could not claim for losses if the deposit is forfeit.
The Tribunal’s decision is based on the fact that, when you pay a deposit for an off-plan property the real asset being acquired (the property) is only acquired when the contract actually completes. There is a rule for CGT purposes that purchase or sale of a property is deemed to occur when an unconditional contract is exchanged, but that only affects the timing of the tax charge, not the reality of the transaction. In any event, off-plan contracts are normally conditional on the building under construction being completed, so the contracts exchanged are not unconditional.
So, does that mean, then, that you can buy properties off plan and sell on the right to purchase at a profit, paying no Capital Gains Tax or Income Tax on the profit? Nice try – but no cigar. Following the logic of the Tribunal’s decision through, if you assign rights under a contract that then does complete, rather than being forfeited, an acquisition and disposal will then have occurred as a result of the completion, and a chargeable gain will have resulted. Make a profit from buying off-plan property and HMRC will take a slice. Make a loss and – well, take all that loss.