Question:
My uncle's property was supposed to be sold in July 2009. He went into contract with the buyer in July 2008. The buyer promise to pay in July 2009 and gave a deposit on the property in July 2008.
Between July 2008 - July 2009, the buyer was paying my uncle interest based on the value of money owed to him.
The buyer has now pulled out and is not demanding any of the money back, so my query is: does my uncle need to pay tax on the money received from the buyer, or are the amounts received tax free?
If there is any tax implication, could you please let me know if it is tax as normal income or as interest received?
Arthur Weller Replies:
Simons Tax Intelligence explains that a non refundable deposit is really an option that the potential purchaser acquires from the potential vendor, to buy the asset during an agreed time scale - i.e. a call option.
As such, the receipt of the deposit is a disposal of an asset (the option) by the recipient of the deposit, and the amount forfeited is treated as the consideration received. The 'option' is a chargeable asset, even though the asset to which it related might have been exempt, e.g. a private residence. So it is taxed as a capital gain.
