Should I pay a non-refundable deposit?

Having recently spent a month negotiating the terms of a non-refundable deposit (also known as lockout agreements & initial deposits), I wanted to share the experience with you.

NRD’s can be complex, and time-consuming to arrange, where some would argue that the time is better spent on progressing the purchase. They are, however, becoming more common, and have even reached the residential end-user market which has caused quite an uproar.

In terms of the benefits, a deposit prior to the commencement of legal costs gives the Seller confidence that the Buyer is committed and likewise, provides the Buyer with an exclusivity period, ensuring that they have the necessary time to carry out due diligence and exchange contracts, without the fear of another prospective purchaser entering into the process.

We hear mixed opinions with regards to non-refundable deposits, where some insist on it and others just don’t want to prolong an exchange timeframe. This can also depend on whether the two parties have transacted previously, or if there is an element of a relationship & trust there.

At GLPG, we spend time advising our clients through the negotiation of deposit terms, where the documents usually evolve into complex legal documents, with a number of clauses and protections to cover many variables. As a Chartered Accountant, completing my ACA qualifications at Deloitte, I am able to advise strongly on tax implications and financial obligations which could result in paying an NRD, as well as provide an insight into options which could be beneficial for the client.

When discussing a non-refundable deposit, the salient points to discuss with the Purchaser, Seller and their respective solicitors are the following:

  • Vacant Possession
  • Material changes in timing/cost
  • Title/covenants/searches
  • Valuation
  • Disputes
  • Exclusivity
  • Warranties (for company sales)

As mentioned above, when applying my accountancy knowledge, individuals don’t often question the tax treatment of the deposit, in the event that the deposit is forfeited.

The main factor here is whether or not the Buyer and Seller is an individual or company, and in the interest of time, I will address the individual scenarios now and company scenarios at a later date.

Recipient Individual:

  • Property Trader – HMRC will likely recognise the deposit as a trading receipt and it will be recognised for tax purposes
  • Property Investor – HMRC may recognise the deposit as a capital receipt, but first, consider if the receipt is chargeable as income as this will take precedence over capital treatment (note that this capital receipt is treated much like the failed exercising of an option)

Forfeited Individual:

  • Property Trader – The expenditure of a lost deposit may be an allowable deduction from profits as long as it was ‘wholly and exclusively’ incurred for trade purposes
  • Property Investor – Generally a non-allowable capital loss, as the loss of the acquisition does not constitute a disposal of an asset (again, treated much like the tax treatment of an option)

Every deal is different and subject to a wide range of variables, therefore please ensure that sufficient due diligence is carried out when looking to enter into a non-refundable deposit scenario, and also when analysing your tax position.

To discuss your buying and selling requirements or if require any advice on non-refundable deposits, please give the GLPG team a call on (020) 3640 6420.

Matt Glazer ACA

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