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Interest payable on contract for sale... IT or CGT?

  • 29-11-2011 11:46AM
    #1
    mozattack
    Registered Users, Registered Users 2 Posts: 1,908 ✭✭✭


    Hi all,

    Any thoughts on this.

    Mr A sells a house for €200k with a condition in the contract to close within 2 months. The purchaser delays and closes in 12 months meaning they are obliged to pay €10k in interest charges on foot of the contract.

    CGT or IT for the vendor?

    I am thinking CGT as it "dervives from an asset" but I have checked Taxfind, Judge and other manuals and cant see any reference. Any thoughts?

    Moz AITI


Comments

  • #2
    Mongarra
    Registered Users, Registered Users 2 Posts: 1,119 ✭✭✭Mongarra


    Not trying to avoid the question but I was banned for answering a property tax post previously as was the OP. Sorry.


  • #3
    mozattack
    Registered Users, Registered Users 2 Posts: 1,908 ✭✭✭mozattack


    Banned for answering? Can answers not be cavaeted. Would welcome some opinion.


  • #4
    beeftotheheels
    Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    If I borrow 1000 off you, and I repay you 1000 then that is capital. If there is interest of 100 then that is interest subject to income tax.

    All lending involves a capital asset somewhere, yet almost all interest is income.

    The mere presence of a capital asset doesn't change this. The specifics of the document might, but the presence of a capital asset does not.


  • #5
    mozattack
    Registered Users, Registered Users 2 Posts: 1,908 ✭✭✭mozattack


    beeftotheheels wrote: »
    If I borrow 1000 off you, and I repay you 1000 then that is capital. If there is interest of 100 then that is interest subject to income tax.

    All lending involves a capital asset somewhere, yet almost all interest is income.

    The mere presence of a capital asset doesn't change this. The specifics of the document might, but the presence of a capital asset does not.

    Fair point but isn't that different because you are referring to a loan scenerio. This isn't a loan, the interest is compensation because of a delay in closing the deal. Could argue that it is compensation derived from the asset (the property) meaning the interest (plus sale price) is subject to CGT?


  • #6
    beeftotheheels
    Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    mozattack wrote: »
    Fair point but isn't that different because you are referring to a loan scenerio. This isn't a loan, the interest is compensation because of a delay in closing the deal. Could argue that it is compensation derived from the asset (the property) meaning the interest (plus sale price) is subject to CGT?

    Let's ignore the loan.

    I buy 1,000 worth of spuds off you to sell in my shop. I don't pay you for 12 months and so ultimately pay you 1,100 (our agreement specifying a 10% interest rate on late payments).

    Do you book 1,100 as turnover i.e. trading income, or do you book 1,000 as income from the sale of the spuds and 100 as interest income - for tax purposes?

    The problem for you is going to come down to the docs. If it is called interest, and calculated as interest (and you need to refer back to the case law here) then you're going to have an uphill struggle proving that it is not interest.

    If it is called compensation, and calculated in a different manner, then you may well be able to argue that it is compensation and a capital sum.

    It will all come down to the facts but read the cases on defining interest, they're pretty broad and remember that an income tax charge takes priority to a CGT one so it is not enough to convince yourself that it is capital. You have to convince yourself that it is not income.


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  • #7
    barneystinson
    Registered Users, Registered Users 2 Posts: 4,686 ✭✭✭barneystinson


    Just throwing this out there... Isn't the date for CGT purposes, the date the contract is made, not the completion date, so any interest arising after that date couldn't really form part of the consideration arising on that date...


  • #8
    Sean Bateman
    Banned (with Prison Access) Posts: 858 ✭✭✭Sean Bateman


    mozattack wrote: »
    Mr A sells a house for €200k with a condition in the contract to close within 2 months. The purchaser delays and closes in 12 months meaning they are obliged to pay €10k in interest charges on foot of the contract

    My view would be CGT treatment for the €200,000 and income tax treatment for the €10,000.


  • #9
    Mongarra
    Registered Users, Registered Users 2 Posts: 1,119 ✭✭✭Mongarra


    mozattack wrote: »
    Banned for answering? Can answers not be cavaeted. Would welcome some opinion.

    It's in the charter. I was not aware of it until I received my ban. A caveat in the answer is not acceptable to boards.ie as they are afraid they might be held responsible for any bad/wrong advice.

    Why this relates to property questions only I am not sure but I am not taking any chances.


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