Using a conditional contract to avoid CGT

Question:

I am 55 years old and my wife is 52. We have owned a development site in the UK along with 4 other family members for over 15 years.

This was originally owned by my Father who left it to us in his will. The probate value then was around £30,000 but it has been estimated at over £1Million now.

My question relates to using conditional contracts and what conditions I need to put into the contract to ensure that dates relating to signing the contract, completing the contract and receiving payment do not compromise me.

The reason for this is that I'm moving to Italy and want to ensure that the disposal is after I've left the UK and therefore exempt from UK taxes.

Answer:

CGT is only avoided if you were to delay any disposal until the tax year following that of your departure as the Revenue could contend that any gains realised on assets disposed of in the tax year of departure should be subject to UK CGT.

Accordingly, if a disposal needs to be postponed until a subsequent tax year, it would be preferable if no contract was entered into until after the following 6 April.

Note that as the asset to be disposed of is land, the Revenue will not be able to contend that an oral contract existed prior to departure, as land must be transferred in writing.

There are two types of contract, unconditional and conditional.

The date of disposal for unconditional contracts is usually the date of exchange of contracts, as beneficial ownership in the assets passes to the purchaser at this date.

By contrast, the date of disposal for a conditional contract is the date that the condition is satisfied. It is important to recognize that the condition must go the heat of the contract and as such there would need to be no transfer of liabilities until/unless the condition was satisfied.

Conditions can be either condition subsequent or conditions precedent.

Conditions subsequent do not give rise to a conditional contract and may require the parties to do various things before completion or may establish how the contract is to be performed. They do not prevent the contract from being binding with immediate effect. If they are not met the contract remains a binding contract but the vendor or purchaser may be able to sue for breach of contract.

One typical example of a conditional contract that is used in practice, is to make any disposal subject to planning permission being granted. This was covered in the case of Hatt v Newman.

In this case the taxpayer decided to sell some land. They exchanged contracts on 21 February 1995, and the completion date was 20 March 1995.

But completion of the contract was conditional upon planning permission being granted. Planning permission was given on 29 March 1995, and completion then took place on 6 April 1995.

The court held that the contract was a conditional contract and the date of disposal for the sale of the property was 29 March 1995, when the condition was fulfilled.

You would therefore need to enter into a conditional contract with the condition being satisfied in the tax year foll wing your departure. It would be advisable to obtain legal advice as to the precise nature of ant term you are considering inserting into the contract, although it is essential that the condition is a true term and that the title does not pass unless the condition is satisfied.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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