‘Banking’ disposals before capital gains tax rates increase

The issue

There has been much speculation in the press about the possibility of changes to capital gains tax in the Autumn Statement on 17 November 2022. Jeremy Hunt’s options are as follows:

1. Cut the annual exempt amount which is currently £12,300.
2. Increase the rates. These are currently 10% at the basic rate and 20% at higher and additional rates (although these are 18% and 28% for disposals of residential property).
3. Make adjustments to reliefs such as Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief. This could include increasing the rate above 10% or alternatively reducing the lifetime allowance, which is currently £1m.

Generally, we would expect that any such changes would not come into effect until 6 April 2023, but taxpayers still get jittery because it is possible that changes can come into force from budget day. It therefore seems appropriate to revisit the rules about the capital gains tax point of a transaction.

Capital gains tax is triggered when a contract becomes unconditional

The date on which a disposal is treated as taking place for capital gains tax purposes is governed by TCGA 1992, s. 28(1) (2) and depends on whether the disposal is made under an unconditional or conditional contract. In cases where the contract is unconditional, the basic rule is that the time of disposal is the time the contract is made and not, if different, the time when the asset is conveyed or transferred (e.g. the date of completion).

If a contract is conditional, then the disposal will not be treated as taking place for capital gains tax purposes until the relevant condition is fulfilled. It is generally considered that a contract needs to have a ‘condition precedent’ (as opposed to a ‘condition subsequent’) in order to be treated as conditional for tax purposes. A condition precedent is an express or implied condition that the contract does not bind one or more of the parties unless and until some stated event has happened. This can be contrasted with one of the parties fulfilling a term of the contract, which is known as a ‘condition subsequent’.

Eastham v Leigh London & Provincial Properties Ltd

In this case, one party to the contract covenanted to build an office block, and the other party was to grant a lease if the offices were completed. It was held that this was not a conditional contract. The requirement to complete the office block was a term of the contract, i.e. something which one of the parties had covenanted to do something about. This can be distinguished from a case where a contract will not bind a party until something happens (e.g. a property will be acquired for £2m if planning permission is obtained).

These factors are all relevant to consider when trying to trigger the tax point of a transaction before an expected tax rise. Sellers will want to ensure that their contract is not conditional and so that they can potentially secure lower tax rates.

Forbes Dawson view

Clearly everybody is in a state of uncertainty at the moment and we do not really know what is going to happen with the rates and allowances. This kind of doubt can be a good tool to accelerate deals which have been dragging on. If rates do go up, then it will be worth double-checking to see whether any ‘conditional contracts’ are really conditional for tax purposes or whether the only conditions are conditions subsequent which do not make a contract conditional for tax purposes. Although this would potentially lead to an earlier trigger point for the tax, the actual tax payable would be lower.




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