Lloyd-Webber – capital gains losses allowed over properties which were never completed

In Lloyd-Webber and another v HMRC [2019] UKFTT 717 (TC), the First-tier Tribunal (FTT) has held that a payment made under a contract for the acquisition of land was for the acquisition of contractual rights, rather than for the land, giving rise to an allowable loss on termination of the contract.

Background

At all material times, Lord and Lady Lloyd-Webber (the taxpayers) were UK tax resident and domiciled in England. 

In 2007, the taxpayers entered into contracts to purchase two plots of land in Barbados on which two villas were to be built on or before 30 June 2009 (the 2007 contracts). 

Pursuant to these contracts, the taxpayers paid a total of $11,293,117 to the vendors for the deposit and subsequent staged payments. The construction work ceased in February 2009, due to cash flow difficulties encountered by the developer. 

In 2011, the taxpayers and the vendors agreed to terminate the 2007 contracts. The taxpayers obtained rights to recover some of their money in return for giving up their rights under the original contracts (the 2011 contracts). The villas were not completed. 

The taxpayers did not acquire any land or recover any money and claimed capital losses of $3,124.311 for the payments made, in their 2011/12 tax returns, under section 38, Taxation of Chargeable Gains Act 1992 (TCGA).  

HMRC issued closure notices disallowing the taxpayers' claims for losses. The taxpayers appealed to the FTT.

HMRC had initially denied relief on the grounds that the taxpayers had never acquired any asset; what they had acquired were contractual rights under the 2007 contracts, which were not assets for CGT purposes. However, by the time the appeals reached the FTT, HMRC's position was that the payments were for the acquisition of the land, and as the taxpayers had not disposed of land (as the land had not been acquired as the properties were never completed), the payments were not deductible under section 38, TCGA.  

The issue for determination by the FTT was therefore whether the taxpayers' expenditure had been to acquire  contractual rights, or  the estates in land, which were the subject matter of the 2007 contracts.

If the FTT concluded that the expenditure was to acquire contractual rights, as such rights are assets, the expenditure could give rise to a loss for CGT purposes. If it concluded that the expenditure was to acquire the estates in land, as the land had never been acquired (due to non-completion of the properties), the expenditure would not give rise to a loss for CGT purposes. 

FTT decision 

The appeals were allowed. 

In determining what the taxpayers had paid for under the 2007 contracts, the FTT said that an objective approach was required. 

The FTT concluded that, although the taxpayers entered into the 2007 contracts with the intention of acquiring completed villas, they acquired only the contractual rights. These rights, the only assets acquired, constituted distinct assets which were later disposed of when the 2011 contracts were entered into, and the losses generated on that disposal were allowable for CGT purposes.

Comment

The taxpayers in this case clearly suffered a loss following significant expenditure on properties which were not completed and by allowing relief for this loss, the FTT's decision is arguably consistent with the CGT regime which, according to Lord Wilberforce in Aberdeen Construction Group Ltd v HMRC [1978] AC 885, is to tax capital gains and make allowances for capital losses. 

The FTT also, importantly, confirmed that the subjective intention of the parties was irrelevant when determining what was actually acquired. That called for an objective analysis of the facts. Although the taxpayers entered into the 2007 contracts with the intention of ultimately acquiring completed villas, the payments made by them were only for the acquisition of contractual rights.

Interestingly,  the FTT revealed that HMRC had accepted that the Upper Tribunal's decision in Hardy v HMRC [2016] UKUT 332 (TCC), which was initially relied on by HMRC, had been wrongly decided, because the earlier decision of the Court of Appeal in Underwood v HMRC [2009] STC 239, had not properly been cited to the Upper Tribunal in that case. As a result, it was not disputed that the taxpayers acquired assets (ie the rights under the 2007 contracts), which were later disposed of. 

Given the wider implications of this decision to other taxpayers, it would not be surprising if HMRC was to seek to appeal this decision to the Upper Tribunal. 

The decision can be viewed here.