For Capital Gains Tax purposes, the disposal of a property takes place at the date of exchange of contracts, not completion. This creates a specific problem when a sale is agreed, contracts are exchanged, but the transaction then falls through before completion.
Why exchange is the disposal date
The rule that exchange creates the disposal (rather than completion) is established in section 28 TCGA 1992. When contracts are exchanged, there is a binding agreement — the property has been disposed of for CGT purposes, even though legal title has not yet passed.
This means that if you exchange contracts on 28 March (in one tax year) and complete on 20 April (in the next tax year), the disposal falls in the earlier year. Tax is due based on the earlier year and not the year of completion or filing of the report.
When contracts are exchanged and then rescinded
If contracts are exchanged and subsequently rescinded — the transaction falls through — HMRC's general position is that the rescission creates a separate disposal. You disposed of the property at exchange, and then reacquired it when the contract was rescinded.
In practice, HMRC accepts that if the original contract is rescinded (unwound as if it never happened), the CGT position may be treated as if no disposal took place. However, this is a nuanced area and depends on the legal nature of the rescission.
The deposit position
When a buyer defaults after exchange, the seller typically retains the 10% deposit. This forfeited deposit is treated as:
- Proceeds from the disposal — if HMRC treats the exchange as a disposal, the retained deposit is part of the proceeds
- Or a compensation payment that must be considered separately
If the contract is then rescinded and the property is resold later, HMRC may treat the original exchange as a disposal at zero net proceeds (the contract was never performed), with the retained deposit as separate income or a capital receipt.
Alternatively, HMRC may treat the original contract as having been varied — the new contract (on the subsequent sale) supersedes the first. In this case, there is one disposal on the eventual successful exchange.
The correct treatment is fact-specific and has been the subject of a number of tribunal cases.
When the seller defaults
If you, as seller, are in breach of contract and the buyer rescinds, you may be required to return the deposit and pay damages. These payments are deductible from proceeds as expenses of the disposal if the disposal is treated as having occurred.
Practical implications
In most straightforward aborted sales, where the original contract is formally rescinded and both parties accept the position, HMRC's practice is not to treat a disposal as having occurred. The property remains in your ownership at its original base cost.
However, if there is doubt about the legal position — for example, if the sale fell through due to a dispute that involved compensation payments — the CGT position should be reviewed.
Documentation
For any aborted transaction, keep:
- The original contract and exchange documentation
- Evidence of rescission (solicitor's letter confirming the transaction has been abandoned)
- Records of any deposit retained or returned
- Correspondence documenting why the transaction failed
If you have exchanged on a property sale that subsequently fell through and are unsure of the CGT position, contact LetsFile. The Chartered Accountant/Chartered Tax Advisor advises on whether a disposal has occurred and what, if anything, needs to be filed with HMRC.