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Drake: CGT on forfeited deposits

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The FTT in a new CGT losses case – Drake v HMRC [2022] UKFTT 25 (TC) (see also Tax Journal, 4 February 2022) – has provided a bluffer’s guide to some the more arcane terms still used in litigation/judgments. The FTT quoted from Jowitt’s Dictionary of English Law to answer the following three questions.

1. What is the ratio? ‘Ratio (short for ratio decidendi) means the legal basis for a judicial decision. It includes only those statements of legal rules or principles that are the essential basis for reaching the decision, as opposed to other observations on the law (known as obiter dicta) which the judgment may contain. The ratio is important in the doctrine of precedent since it is only that part of the judgment of a superior court that constitutes a precedent.’

2. What is a per incuriam decision? ‘A decision or dictum of a judge which clearly is the result of some oversight is said to have been given per incuriam’ – and if so, it would not be a binding authority.’

3. If a precedent is not per incuriam, can it still be distinguished? ‘Even where a precedent is binding a court may seek to “distinguish” it if it considers that to follow it would bring about an unjust result in the instant case, i.e. it may point out differences between the two cases which may be said to render the earlier decision inapplicable to the instant case; but this is legitimate only where the differences are material to the point in question.’

The Drake case was about whether a forfeited deposit on a lease of land gives rise to a capital loss. The FTT decided it was bound by the earlier case of Hardy [2016] UKUT 332 (TCC) and the rescission of the contract, by reason of the appellant’s repudiatory breach, did not constitute a disposal of an asset for capital gains purposes.

The Hardy decision has been widely questioned, especially for the Upper Tribunal’s conclusion that the rights to acquire land under a contract are not ‘assets’ for CGT. HMRC has elsewhere accepted that this was indeed decided per incuriam (see Lloyd-Webber & another v HMRC [2019] UKFTT 717 (TC)). I expect one day the Court of Appeal will need to address the point head on.

However, in Drake, the FTT merely went on to say: ‘I am not persuaded that Hardy was correct to say ... that rights under a contract to acquire land are not assets for capital gains tax purposes ... However, it is not necessary to reach a firm conclusion on this point because, even if they are, it is clear that a forfeited deposit of purchase money does not constitute the disposal of a capital gains asset: see s144(7) read together with s144(4).’  

Issue: 1563
Categories: In brief