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Foreign Home Buyers Beware

foliageA man who lost his savings in an ill-fated attempt to buy a holiday home in Cyprus which never progressed beyond a shell must now also pay tax on interest earned on the contents of a foreign bank account of which he never received a penny. Whilst sympathising with the taxpayer and his financial predicament, the first-tier tribunal dismissed arguments that the interest did not amount to taxable income.

The taxpayer had, with his wife, contracted to buy the property ‘off-plan’, paying a substantial deposit and borrowing the balance of the purchase price which was placed in an escrow account in Cyprus. Most of the money was paid to the developer who became insolvent after mortgaging the building plot to secure its own borrowing.

Acknowledging that his grasp of the financial details was not complete, the taxpayer refused to keep up payments on the loan agreement once the true state of affairs became apparent. The bank in Cyprus treated that as a default and exercised its charge over the remaining contents of the escrow account. Her Majesty’s Revenue and Customs (HMRC) assessed the taxpayer and his wife for tax on the interest that had been earned on the money in the escrow account over a two-year period.

On appeal to the tribunal, the taxpayer argued, inter alia, that he had never derived any benefit from the funds in the escrow account and thus could not be held liable for tax on interest earned on those sums. However, rejecting his pleas, the tribunal accepted HMRC’s arguments that the escrow account was in the joint names of himself and his wife; they had been the joint legal owners of its contents and that regularly credited interest had been ‘available to be spent’ by them.