If a buyer pulls out and you keep their deposit, section 144(7) of the Taxation of Chargeable Gains Act 1992 taxes the deposit as if it were the price for an option to buy that was never exercised. For a private seller or investor that is a capital gain, separate from the property itself, so the property’s base cost is left untouched. If you deal in property as a trade, or the deposit came from a tenant, it is income instead.
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Why is a kept deposit treated like an option?
Section 144(7) TCGA 1992 says the options rules apply to a forfeited deposit of purchase money, or other consideration money for a prospective purchase or other transaction which is abandoned, as they apply to the consideration for an option binding the grantor to sell which is not exercised. HMRC’s Capital Gains Manual repeats this at CG12390 and, at CG13000, explains the effect: the forfeiture is treated as a deemed disposal of an asset separate and distinct from the asset that was to have been sold under the contract.
Without this rule, a kept deposit could be argued to be a capital sum derived from the property, or from the seller’s rights under the contract. Section 144(7) settles the point by treating it as the disposal of an option. The general options rules are in our guide to options and capital gains; this page deals only with deposits.
How is the seller’s gain worked out?
Under section 144(1), the grant of an option is the disposal of an asset, namely the option, and CG12312 says it is not a part disposal of the asset the option is over. The only allowable expenditure in computing the gain is the cost of granting the option. Applied to a deposit, that means:
- the deposit is the disposal proceeds of a separate asset;
- you cannot deduct any part of what you paid for the property against it; and
- the property’s full base cost remains available when you eventually sell it.
CG13000 describes the forfeiture as the deemed disposal, so the gain belongs to the tax year in which the deposit is forfeited. It goes into that year’s capital gains calculation with your other gains and losses, and the annual exempt amount of £3,000 for 2026 to 2027 is available if not already used. For 2026 to 2027 the rates on gains are 18% within the basic rate band and 24% above it.
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What if the property was my home?
Take care here. CG12370 accepts that private residence relief is due where an owner grants an option to buy all or part of their only or main residence, or of garden within the permitted area. CG12390, HMRC’s guidance on forfeited deposits, is a single paragraph and does not deal separately with homes. If you keep a large deposit on the sale of your main home, confirm the treatment rather than assuming either way, and see our guide to private residence relief.
What about the buyer who loses the deposit?
From the buyer’s side, the deposit is treated like the cost of an option that was never used. Section 144(4) says that abandoning an option is not a disposal, so normally no allowable loss arises, and CG12340 confirms this. Section 144(4)(c) makes an exception for an option to acquire assets the holder intended to use in their trade, and CG12360 says HMRC may accept this where the trade began shortly afterwards and the evidence clearly shows that intention. A business buyer who loses a deposit on premises for its own trade should look at this exception.
When is a kept deposit trading income instead?
Section 37(1) TCGA 1992 excludes from a capital gains computation anything taken into account as a receipt in computing income or profits. So if the deposit is taxed as income, it is not also a gain.
A property developer or dealer holds its properties as trading stock, and a sale of stock is a trading transaction. HMRC’s Business Income Manual says income arising from a trading transaction is a trading receipt (BIM40205). A deposit kept when a buyer of a dealer’s stock pulls out is therefore part of trading profits for income tax or corporation tax, recognised in line with the accounts. Whether you are a dealer or an investor depends on the badges of trade, explained in our guide on whether you are a property developer or investor.
And when is it property income?
A landlord’s position is different again. PIM1051 lists deposits and bonds taken from tenants among the receipts of a property business, and PIM1052 says deposits not refunded at the end of a tenancy should be included as income at that point, to the extent not already recognised. A landlord on the cash basis follows PIM1094 on when deposits count. So a deposit kept from a tenant goes through the rental accounts, while a buyer’s deposit kept on an aborted sale of the rental property itself stays within capital gains, unless the landlord is also trading in property. Our guide to tenancy deposits covers the rental side in detail.
VAT is a separate question again. Whether VAT is due on a deposit kept by a VAT registered seller depends on whether it was consideration for a supply, as explained in VAT on deposits and advance payments.
How does it work in numbers?
Illustration only. Sam, an individual investor, agrees to sell a small industrial unit for £350,000 and receives a deposit of £35,000 on exchange. The buyer fails to complete and the contract is ended, so Sam keeps the deposit. Ignoring costs:
| Step | Effect |
|---|---|
| Deposit forfeited in 2026 to 2027 | Gain of £35,000 on the deemed option, taxed in 2026 to 2027 |
| Annual exempt amount, if unused | £3,000 deducted, leaving £32,000 taxable |
| Unit sold to another buyer the following year for £360,000 | Gain worked out using the full original cost; the £35,000 is not deducted from or added to the price |
If Sam were a property dealer, the £35,000 would instead be a trading receipt and the capital gains steps would not apply.
What mistakes come up most often?
- Leaving a kept deposit off the tax return because the property was not sold.
- Deducting part of the property’s cost from the deposit, as if it were a part disposal.
- Reducing the base cost of the property by the deposit on the later sale.
- A dealer or developer reporting the deposit as a capital gain instead of a trading receipt.
- A buyer claiming a capital loss for a lost deposit on a private purchase, which the options rules do not allow.
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Related Accountapedia entries
- SDLT first time buyer relief
- Gifting a house deposit to your child: tax effects
- LBTT first time buyer relief in Scotland
- VAT on deposits and advance payments
- Deposits paid on fixed assets
Sources
- legislation.gov.uk: Act 1992 c. 12, section 144
- GOV.UK: Manual page CG12390
- GOV.UK: Manual page CG13000
- GOV.UK: Manual page CG12312
- GOV.UK: Allowances
- GOV.UK: Rates
- GOV.UK: Manual page CG12370
- GOV.UK: Manual page CG12340
- GOV.UK: Manual page CG12360
- legislation.gov.uk: Act 1992 c. 12, section 37
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.