Tax Treatment of Forfeited Deposits: What Happens When a House Sale Collapses?

When a property sale falls through, the parties involved often focus on the loss of the property purchase/sale and finding a replacement deal, but there are important tax considerations to think about where the buyer’s deposit has been forfeited.

The Seller

For the seller, the receipt of the forfeited deposit is a taxable event.

For most taxpayers, the receipt will be a chargeable disposal subject to capital gains tax (CGT).  The main exception to this is property traders who will usually treat the payment as a trading receipt and pay income tax/corporation tax accordingly.

Assuming the CGT rules apply, for the purposes of calculating the capital gain the forfeited deposit is treated in the same way as an abandoned option.  This means that the seller is treated as disposing of an asset separate to the underlying property. The consideration for this disposal is the amount of the forfeited deposit.

Therefore, when the deposit is forfeited, the seller will have a capital gain based on the difference between the amount of the forfeited deposit and any allowable expenses.

The seller’s annual exemption (£12,300 for 2022/23) may be available to set against this capital gain.

Once the taxable gain has been calculated, the next step is to apply the correct rate of CGT.  Where the gain relates to a transaction involving residential property, the residential rates of CGT of 18/28% will apply (for basic/higher rate taxpayers).  Otherwise, the standard rates of CGT of 10/20% will apply.

If a CGT liability arises this must be reported to HMRC by the following deadlines:

·         If subject to the residential rates; 60 days from the date the deposit is forfeited using a UK Property Account

·         For all other disposals; by 31 January after the end of the tax year using a self-assessment tax return

The Buyer

As noted above, most buyers will be within the CGT rules under which the forfeit of the deposit is not treated as a disposal of an asset therefore the amount paid is not a capital loss.

This position has been confirmed in the 2016 Upper Tier Tribunal decision in Hardy v Revenue & Customs Commissioners and the 2022 First Tier Tribunal Decision in Drake v HMRC.

For property traders, if the expenditure is incurred wholly and exclusively for the purposes of the trade then a deduction may be allowed under the usual trading rules.