James Bailey looks at ‘gifted deposits’ in property transactions and their tax treatment.
A recent case before the First-tier Tribunal (Day and Anor v Revenue & Customs [2015] UKFTT 142 (TC)) holds some valuable lessons for landlords selling a buy-to-let property.
One of the properties in the above case had been sold using a ‘gifted deposit’ scheme.
Gifted deposit schemes
These schemes used to be very popular and were promoted as a way of becoming a property owner without having to come up with any of the purchase price. The seller of the property would agree to take (say) 5% less than the asking price (which was itself often a somewhat inflated one), but this would be done by the seller making a ‘gift’ to the buyer of the 5% difference. The buyer could then obtain a 95% mortgage on the stated purchase price, but the other 5% was provided by the seller so the buyer had none of their own money invested in the property.
Everyone seemed quite relaxed about this practice, even though to me it looked very much like a fraud on the lender of the money, if they were not informed about the ‘gift’. I recall raising this with a senior manager at one of the high street banks and asking what he thought about it. He asked me one question: ‘In this hypothetical situation, does the buyer keep up with the mortgage payments?’ When I replied ‘yes’, he gave me his professional opinion: ‘Why should I care, then?’
This particular scheme was operated in the above case with the full knowledge of the lender involved – indeed the scheme was organised by the Halifax. Under the scheme, Mr Day and his co-investor effectively paid the 5% deposit on the sale to themselves, purportedly on behalf of the buyers, and the Halifax provided the buyers with a loan of the other 95% of the sale price. The point was to enable the Halifax to lend the buyers the whole of the actual purchase price whilst being able to record it as a 95% mortgage rather than a 100% one.
Tax treatment
HMRC contended that the sale proceeds for capital gains tax (CGT) purposes should be the whole amount shown in the sale documentation (£66,300), rather than the price after the ‘gifted deposit’ of £62,985.
The Tribunal described the £66,300 as ‘a label’ and agreed that the correct sale proceeds were the amount after the gifted deposit - £62,985.
The important point, however, was what they said about gifted deposits in general and their view of the rights and wrongs of them. In the Day case, the gifted deposit had been paid with the full knowledge (indeed, with the encouragement) of the Halifax, the lender concerned. The Tribunal suggested their view might have been very different if the deposit had been ‘gifted’ without the lender’s knowledge (as many were when this was a popular ruse in the buy-to-let market).
They did not mince their words, either:
“If the appellants had fraudulently paid the deposit in order to help the purchasers obtain a 95% mortgage, we might well not have been persuaded that the appellants could rely on that fraud to reduce their tax liability.”
The thing that saved Mr Day and his co-investor was that this was one of the ‘respectable’ gifted deposits, because the lender concerned knew about it and indeed was promoting it. Things might have been very different if it had been one of the ‘under the counter’ schemes that were around at the time.
Practical Tip :
If you bought a property using a gifted deposit scheme, the correct purchase price for CGT purposes when you come to sell it is likely to be the price net of the gifted deposit.
If anyone suggests using a gifted deposit, make certain the lender is fully aware of what is going on, and agrees to it.
