Lloyd-Webber v HMRC: Music to off-plan investors' ears?

In a decision that will be a welcome source of comfort for investors in potentially risky off-plan property developments, the First-tier Tribunal (Tax) ("FTT") in Lloyd-Webber v HMRC [2019] UKFTT 717 (TC) has held that losses stemming from the purchase of property off-plan are allowable losses for the purposes of capital gains tax ("CGT").

Background

In 2007, Lord and Lady Lloyd-Webber (the "Taxpayers") entered into contracts to buy two villas in a proposed development in Barbados (the "2007 Contracts"). The 2007 Contracts provided for payments to be made in stages according to the progress of the development of the villas. In 2009, construction of the villas ceased due to financial difficulties being experienced by the developers. By that stage, the Taxpayers had paid approximately £6.25m under the 2007 Contracts.

In 2011, seeking an exit from the project, the Taxpayers exchanged their rights under the 2007 Contracts for a set of rights under new contracts (the "2011 Contracts") which provided for them to recover a certain amount of money in the event of the development being completed and the villas being sold. The value of the Lloyd-Webbers' rights under the 2011 Contracts proved to be negligible (a fact accepted by the FTT).

The Taxpayers claimed the sums paid under the 2007 Contracts as capital losses, which they sought to offset against other capital gains realised by them. HMRC disallowed the Taxpayers' claimed losses.

The parties' arguments

The parties' legal arguments centred on the interpretation of s.38(1) of the Taxation of Chargeable Gains Act 1992 (the "TCGA"). This provided (relevantly) that to be an allowable deduction for CGT purposes (and thus to be capable of generating capital losses) an amount must have been paid for the acquisition or enhancement of the asset disposed of.

HMRC argued that s.38 imposed a subjective test of what the relevant amounts were paid for. HMRC contended that the Taxpayers' subjective intention was to acquire villas, not contractual rights. It followed, HMRC argued, that the £6.25m was spent on the villas, which were never acquired; the only assets that the Taxpayers did acquire (and dispose of) were the rights under the 2007 Contracts, but the £6.25m was not spent on these. HMRC argued that this meant that the Taxpayers could not claim the £6.25m as capital losses realised upon the disposal of the rights under the 2007 Contracts.

The Taxpayers argued that s.38 imposed an objective test – that is, it must be ascertained what the money was actually paid for. If the only assets acquired were the rights under the 2007 Contracts, it followed that the £6.25m was paid for the acquisition or enhancement of those rights.

The FTT's decision

The FTT held in favour of the Taxpayers.

The FTT first clarified that contractual rights were considered an asset for CGT purposes.

The FTT began its substantive decision by reciting the well-established principle that CGT was intended to apply to real-world gains and losses, which would generally accord with business common sense.

Regarding whether s.38 imposed a subjective or objective test, the FTT held that the test was objective. Although the FTT did not cite express authority to this effect, it interpreted the Court of Appeal's decision in Drummond v HMRC [2009] STC 2206 as having followed this approach, and it drew support from the Upper Tribunal's decision in Price v HMRC [2015] STC 1975. The FTT declined to follow the Upper Tribunal's (obiter) comments in Hardy v HMRC, which directly supported HMRC's arguments in circumstances very similar to those of this case, on the basis that (a) they were obiter, (b) they followed a decision that was clearly incorrect, and (c) they were made following very little reasoning.

The FTT therefore concluded that the £6.25m had been paid by the Taxpayers for the acquisition of their rights under the 2007 Contracts. The FTT also agreed with the Taxpayers that this conclusion accorded with the general scheme of the TCGA, which indicated that relief should be allowed in these circumstances. The FTT further noted that this was consistent with the "real world" approach to capital gains and losses established by the courts.

Comment

The FTT's decision gives effect to the reality of an investment in off-plan property, by recognising that, whether or not the property is ultimately acquired, the investor has made an investment and made a loss on it. Accordingly, tax relief will be available to mitigate the extent of any such loss.