What did they actually pay for? – The key point in the case
The case hinged on whether the up-front payments were made to acquire or enhance contractual rights or to acquire land, which was the contemplated subject of the contracts. HMRC, arguing for the second position, claimed that since the land was not ultimately acquired, there was no allowable loss for tax purposes. If the distinction sounds slippery, this may be due to the fact that several rules of capital gains tax (CGT) are potentially in play and it is not obvious, even after reading the judgment, which should prevail.
HMRC agreed that contractual rights can count as ‘assets’ for CGT purposes, albeit the tax outcome depends on the manner in which the contract fails to complete. Therefore, it was mutually accepted that if the parties simply abandon a contract then no loss is allowable. The Lloyd-Webbers had, however, agreed with the developer to terminate the original contract in exchange for new (and valueless) rights. The creation of these rights is different from casual abandonment and can, as a matter of principle, create a capital loss.
Nevertheless, they still had to navigate the special rules applicable to options and forfeited deposits, which entail an ‘all or nothing’ approach. If the contract completes, the price of the option or the deposit will count as part of the cost of the tangible asset (such as land). But if the option is abandoned or the deposit is forfeited, such events do not count as a disposal of contractual rights and the prospective purchaser cannot claim a loss.
How the Lloyd-Webbers successfully steered a middle course (i.e. obtaining an allowable loss in the absence of completion) was not fully explained in the judgment, so the natural inference must be that their staged payments collectively amounted to something more than a simple deposit.
How could this affect you?
The Tribunal judge explicitly applied a ‘real world approach’ to the Lloyd-Webbers' commercially genuine loss and, if such an approach prevails, it could yield valuable capital losses when complex ‘off-plan’ purchases go bad. Property developers still find it difficult to raise capital from banks, so contracts for buildings or apartments that have not yet been built are unlikely to go out of fashion any time soon.
Whether HMRC will accept the necessary ‘middle course’ without challenge is of course another matter.