Capital loss for lost deposits?

The issue

One issue which sadly crops up  sometimes is the question of whether tax relief can be claimed on a lost deposit. Many commentators have concluded, perhaps wrongly, that this is generally a ‘tax nothing’ with no relief being allowed. This issue was brought into sharper focus in the case of Lloyd-Webber & Anor [2019].

Lloyd-Webber case

In 2007 Lord and Lady Lloyd-Webber entered into contracts to acquire two villas in Barbados once they were built.  Construction stopped and the Lloyd-Webbers terminated their rights under the 2007 contracts in return for rights under contracts entered into in 2011. The 2011 contracts allowed them to recover some monies assuming the development proceeded successfully and the villas were sold on.  At the time of acquisition their rights under the 2011 contracts had negligible value and no proceeds were ultimately received in respect of them. They therefore claimed capital losses in their 2011-2012 tax returns by making a negligible value claim in respect of the contractual rights. These losses were challenged for various reasons:

1. Was there an asset? (it was found that the asset was the contractual rights).
2. The money would have needed to be paid for the contractual rights rather than the land (as the Tribunal considered that this was an objective rather than a subjective test they had no difficulty in deciding that the money was paid for the contractual rights).
3. There was some esoteric discussion about what would have happened to the base cost of the contractual rights if the land had been acquired. It was agreed that due to a somewhat obscure provision (section 43 TCGA 1992 for those interested) the base cost of the rights could be applied to the property.

Forbes Dawson Comment

This case seems fair because it recognises the economic loss in relation to a capital asset. It also acts as a reminder of the value in making negligible value claims in cases where assets have lost value. The Lloyd-Webber approach may offer a sliver of consolation for sun-seekers who have found themselves on the wrong end of a holiday home deal – particularly if they can foresee gains on the horizon against which they can offset their losses.

 

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