Capital Gains Tax – date of disposal for assets sold under contract
With ongoing reporting in the media regarding a possible significant rise in the headline rates of capital gains tax (CGT) which could take effect as early as budget day on 30 October 2024, we have outlined below a high-level reminder of the relevant dates of disposal for capital assets disposed of under contract.
Whilst the risk of any increased rates being coupled with anti-forestalling measures that could impact transfers that haven’t completed before budget day means the safest approach will still be to ensure transactions are completed in advance of 30 October, for any sellers that are pressed for time it is worth remembering that the deemed date of disposal for CGT, which is the key date for assessing liability to tax, isn’t necessarily linked to the date the transfer completes. For assets disposed of under contract the date contracts are exchanged is often the key date, even where completion occurs later.
Date of disposal
Should there be a change in CGT rates, the date of disposal of an asset (and whether that date is before or after the date the change takes effect) will be the key date for any seller in determining what rate of CGT should apply to their sale. For capital assets disposed of under contract the date of disposal for CGT is subject to specific deeming provisions set out in UK legislation, which depend on whether the contract is considered to be conditional or unconditional at the time of signing.
Section 28 of the Taxation of Chargeable Gains Act 1992 is the relevant statutory provision for governing the CGT date of disposal for an asset sold under contract. The starting point being that the time of disposal is the time when that contract is signed. For example, for a contract that is signed on 17 October 2024, the starting point for the date of disposal will be 17 October 2024 and the disposal would be subject to CGT rates in effect as at that date (i.e. current rates of CGT) even if the physical transfer of the asset completes after budget day.
However, an exception applies if the contact is conditional at the date of signing, or if the sale is conditional on the exercise of an option. In that case the relevant date of disposal is delayed to the date the relevant conditions are satisfied or the option is exercised. Whilst this again is likely to fall before the date of the actual transfer of the asset it could cause a timing issue for contracts signed ahead of budget day. For example, if a conditional contract was made on 4 September 2024, the conditions are satisfied on 29 October 2024 but the contract completes on 1 November 2024 the time of disposal for CGT purposes will be 29 October 2024, which would still fall ahead of the budget day. However, if the contractual conditions were not satisfied until 1 November 2024 the time of disposal would then be delayed to 1 November 2024 and the disposal would be subject to the rates of CGT then in force.
Conditional or unconditional contract
For any contracts that provide for split signing and completion analysing whether such contract is conditional at the date of signing is therefore of key importance in determining the tax treatment. Careful consideration will be needed of contractual terms and their legal effect and an important distinction is drawn between conditions that are considered as “conditions precedent” and those that are considered to be “conditions subsequent”. HMRC guidance and case law has established that whilst a condition precedent would delay the date of disposal under a contract a condition subsequent would not, meaning the distinction could therefore have material consequences for any contracts straddling budget day.
Determining whether a contract is conditional, and whether a condition is a condition precedent or a condition subsequent, isn’t guided by any principles set forth in tax laws. This will instead be driven by general provisions of contractual law and interpretation of contracts which isn’t always straightforward.
HMRC broadly state in their guidance that a condition precedent will exist where a contract only becomes legally binding on the parties once that condition has been fulfilled. On the other hand, a condition subsequent will be something that the parties are required to fulfil under the terms of the contract before it completes. A condition subsequent is effectively a condition that goes to the performance of a binding contract and not to whether the contract itself is binding on the parties.
Whilst in some cases this will be easy to establish that isn’t always the case and detailed questions of contractual interpretation will arise on the legal nature of the condition in the event of any grey areas. At times it may be more helpful to look at any condition in a contract from the question of whether it is a “contingent condition”, i.e. one where the obligations under the contract are contingent on the occurrence of a specific event which neither party promises to bring about (which will make a contract conditional) or a “promissory condition” which is something one of the parties promises to do under a legally binding contract before the other party is liable to perform its obligations under that contract (which may not make a contract conditional).
As an example of the narrow distinctions that can arise in this area, a conditional contract could include a sale of shares conditional on obtaining regulatory clearance or where a hotelier makes a booking with a tour operator conditional on the next Olympic games being held in London. The contract would be conditional until clearance is obtained or it has been decided that the games are going to be held in London. On the other hand, the courts have previously decided that a contract with the owners of land to the effect that if the taxpayer completed a building on the site in accordance with the relevant conditions in the contract the landowner would grant a lease of the land to the taxpayer was not a conditional contract, and the interest was acquired by the taxpayer on the date of the contract. This was on the basis that although the lease was dependent on the completion of the building, that obligation formed part of the taxpayer’s obligations under the contract and formed part of the landowner’s promise to grant the lease.
Practical impact
For any sellers looking to trigger a disposal of their assets before the forthcoming budget but who don’t have sufficient time to practically complete the transfer it may be worth remembering that the date of disposal is likely to be earlier than the date of the completion of the actual transfer. However, sellers should be alert to the risk that any conditions in the contract may delay the date of disposal beyond budget day and appropriate legal advice should be sought on the impact of any conditionality. Sellers should also be alert to the risk that any increase in rates could be coupled with far reaching anti-forestalling measures (for which there is precedent for in year changes to CGT from when changes were made to Entrepreneur’s Relief) that could have the effect of delaying the date of disposal for any disposals that straddle budget day. Great care will also need to be exercised before any binding contracts are amended after any increase in the rates of tax take effect, and legal advice should be sought to confirm that the amendment isn’t so fundamental as to effectively constitute an entirely new contract and corresponding date of disposal.
We provide detailed and in-depth advice in relation to all tax and contractual matters that affect businesses and individuals. Our contractual and tax advice recognises that commercial and pragmatic solutions are often required, and our Corporate, Tax and Commercial teams have sufficient depth of expertise to deliver.
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