Practice note 3: "chose in action"
The Valuation Office Agency's (VOA) technical manual used to assess Capital Gains and other taxes.
Requests from Inspectors will be made directly to the local DVS Registration Centre rather than via CEO, as in the past. The Inspector’s request may not use the term “Chose in Action” but will usually ask for the valuation of an “unascertainable deferred consideration”.
This practice note gives background information, procedural guidance and offers some example valuations. Where additional guidance or assistance is required the caseworker should contact CEO Technical Centre.
A “chose” is a right, and may be one of two kinds, “choses in action”, and “choses in possession”. A “chose in action” is a right of which a person does not have present enjoyment, but may recover it (if withheld) by action. This may be assigned by writing, if signed by the assignor, absolute in terms and notice in writing being given to the debtor. A “chose in possession” is a right of which the owner has the actual enjoyment. A “chose” is property and is defined in s.136(1) Law of Property Act 1925.
For the purposes of taxation it may therefore be treated as an asset, although it may not comprise an interest in land.
3. Taxation of a “Chose”
For the purposes of this practice note it is only necessary to consider a “chose in action” and in essence the matter concerns the taxation of a vendor where an asset has been disposed of for consideration, some or all of which is due after the date of disposal.
Basically this divides into two types of case:-
Transactions where the consideration due after the time of the disposal is ascertained or ascertainable (albeit possibly only contingently payable) at the time of disposal;
Transactions where the consideration due after the time of the disposal is unascertainable at the time of disposal.
In practical terms DVs will be involved only in valuations for the second type of case. A further complexity may arise where the asset disposed of is land and in particular where the sale proceeds are linked to its future redevelopment and the possibility then exists that the transaction comes within the scope of s.776 ICTA 1988 which concerns “Transactions in Land” and may give rise to the Inspector seeking to tax any gain as income “which constitutes profits or gains chargeable to tax under Case V1 of Schedule D”.
4. Ascertainable and Unascertainable Consideration
Whether the consideration due after the time of disposal is ascertained or unascertainable depends on the precise terms of the particular sale agreement. Experience shows that these are generally comprehensive and cumbersome documents.
An example of an ascertainable amount might be if an agreement for the sale of land provided that the consideration would be £300,000 of which £100,000 is payable on completion of the sale and £200,000 will be payable two years after completion depending on whether a specified event (eg the grant of planning permission or the provision of a sewer etc) has or has not occurred by that date.
In these circumstances under the provisions of s.48 TCGA 1992 £300,000 is the consideration to be included in the initial computation of the chargeable gain arising on the disposal of the asset.
In this situation the taxpayer may be liable to pay a significant amount of tax prior to receiving the full consideration. In certain circumstances s.280 provides that the tax may be paid by instalments over a period not exceeding 8 years and ending not later than the date upon which the last of the consideration instalments is payable.
Consideration which is not ascertainable at the date of disposal is the area in which DVs are most likely to be asked to provide valuation advice.
In general terms the agreement for sale of the subject land (and/or buildings) will enable the vendor to receive an ascertainable sum of money at the date of sale, plus a conditional and unascertainable amount at an unascertained future date. The amount of the future sum may be totally open-ended and impossible to ascertain (even in a contingent amount) as at the date of disposal of the original asset. Therefore, it will not be possible to bring the further payment(s) within the provisions of s.48 TCGA 1992. (A practical example is contained under Valuation below).
5. Synopsis of Case Law
In both the Ingles case and the Marriage case the point in dispute was whether any chargeable gain arose when the further amounts due under the agreements were received. The computation of the chargeable gain arising on the disposal of the original asset was not directly in issue in either case. However, the judgements in the two cases provide useful guidance as to the chargeable gains consequences of this type of transaction.
5.1 Marren v Ingles 54 TC 76 (the “Ingles” case)
In the above case, under the terms of an agreement dated 15 September 1970, for the sale of some shares in a company, Mr Ingles was entitled to receive an initial quantifiable sum which would be payable in the event that shares in the company were subsequently quoted on the stock exchange.
The amount of the further sum would depend upon the price at which shares in the company were quoted in the Stock Exchange Official Daily List on the first day of dealings.
Mr Ingles accepted that the consideration to be included in the chargeable gains computation on the disposal of the shares on 15 September 1970, should be the initial quantifiable sum plus the value, as at 15 September 1970, of his right to receive the deferred unquantifiable payment.
The further sum was in fact received in 1972-1973 and the House of Lords held that the right to receive the further sum was itself a separate chargeable asset and that it was not simply a deferred part of the price of the shares. Under what is now s.22(1) TCGA 1992 there was in 1972-1973 a disposal of that asset, a further sum being a capital sum derived from the asset. The House of Lords rejected Mr Ingles contention that the receipt of the further sum was in satisfaction of a debt and therefore exempt under what is now s.251(1) TCGA 1992.
5.2 Marson v Marriage 54 TC 59 (the “Marriage” case)
In the above case Mr Marriage sold some 47 acres of land to a company on 31 March 1965 (that is before CGT came into force on 6 April 1965) for some £47,000.
Under a supplemental agreement also on 31 March 1965 the company agreed to pay Mr Marriage £7,500 for each acre of land it was permitted to develop at 8 units per acre within 21 years of the agreement (proportionately lower if a lesser density was permitted).
If the land was nationalised or compulsorily acquired, the company was to pay to Mr Marriage one-half of the payment it received.
In 1976, the company paid Mr Marriage some £348,000 in full settlement of his rights under the supplemental agreement. The High Court rejected Mr Marriage’s contention that the supplemental agreement quantified further consideration to be received by him (that is £47,000 plus £7,500 per acre for the 47 acres) and that what is now s.48(2) TCGA 1992 would have required that the quantified consideration be brought into the computation of gain at 31 March 1965, if the statute had then been in force.
The Court took the view that the consideration could not so be quantified because of the alternative payment which would be due if the land was nationalised or compulsorily acquired.
At 31 March 1965 that amount would have been wholly uncertain and could not at that date have been quantified. The principle in Marren v Ingles was therefore applied and the 348,000 was held to be a capital sum derived from a chargeable asset, namely the right to receive future payments.
The situation facing the DV in “Chose in Action” cases may be summarised as follows.
Under the terms of a sale agreement the vendor becomes entitled to a fixed sum payable on completion plus the right to a further amount unascertainable at the time of disposal; that right is a “chose in action” and it is this which has to be valued by the DV. The date of sale is the point at which the vendor disposes of the “interest in land”, therefore one asset is disposed of and another, albeit not an interest in land, is created.
For CGT purposes the valuation date is the date of disposal (generally the date of contract rather than date of completion. S.28(1) TCGA 1992).
The consideration received is the fixed amount, plus the value ascribable to the asset created. This value is then the base value for the new asset. In practical terms if the “chose” comes to fruition the amount assessable to CGT remains the same whether a high value is ascribed to the “chose in action” at the date of the original disposal or a low one is ascribed. However, the circumstances of particular taxpayers will dictate whether it is in their interests to pursue high or low valuations.
The actual assessment of tax on the “chose in action” and any sums derived from it are matters solely for the Inspector and DVs must not be drawn into discussions with taxpayers or their agents who may be seeking to decide whether to pursue a “high” or “low” valuation approach.
With regard to the s.280 TCGA 1992 mentioned above, it is considered by the Revenue that these do not apply in cases where the consideration is unascertainable.
The Inspector’s instructions require that prior to requesting valuation advice they should first obtain the taxpayer’s agents agreement as to what is required to be valued and any valuation which the agent wishes to put forward. The Inspector’s request for a valuation should then be sent to the DV, giving details of the original asset disposed of, what is to be valued, at what date the valuation is to be made, a plan, and the name and address of the taxpayer. Generally, a full copy of the sale agreement will be provided so these cases are invariably bulky.
The cases can be ‘not negotiated’ or ‘agreed’ requests and the usual time limits and procedures apply as for other CGT valuations. The case type should be either 142 or 143 and the complexity code ‘2’ or higher. If the taxpayer or taxpayer’s agent disputes what is required to be valued the matter must be referred back to the Inspector to be resolved.
8.1 Part share interests
In instances where the taxpayer is entitled to only a part of any future payments rather than the entirety, it is not considered appropriate to make any discount from the proportionate share in respect of this type of interest.
8.2 Valuation examples
The following is an example of a “typical”, (insofar as any of these cases can be said to be typical) “chose in action” valuation. DVs are obviously free to adopt whatever approach they see fit in the circumstances of each individual case.
A is a farmer with a 50 acre small holding situated in the designated “green belt” on the edge of an expanding town. Planning permission for residential development is thought to be available in 5 years at soonest, if the long term policy of the planning authority is carried out. Limitations imposed by the drainage system of the area would currently limit development to a maximum of 100 units, but if the projected infrastructure improvements take place it would allow development up to a maximum of 300 units. A enters into an agreement with a developer, under which he is to receive agricultural value for the entire farm immediately (£2,000 per acre); A will grant vacant possession and take early retirement. If during a period to commence 5 years hence and to run for a maximum of 15 years therefrom (20 years from now) planning consent becomes available A will receive £10,000 per planning unit granted. (This relates to a percentage of full development value at today’s date). The documents include safeguards to ensure “maximum” planning consents are applied for. It is considered that planning consent for 100 units is very probable but for the maximum coverage of 300 units only fairly probable.
8.2.2 Valuation Approach
|1.||Immediate Proceeds:-||50 acres||x £2,000 =||£100,000|
|2.||Chose in Action:-|
|(A) Assess how many planning units will be obtained||100 (almost certain)||200 (possible) 300 maximum|
|Pragmatic approach,||Say 200 units|
|(B) When will consideration be received||(1)||Minimum period 5 years|
|(2)||Maximum period 20 years|
Pragmatic approach plus knowledge of any local difficulties say planning consent available in 10 years.
Possible valuation approach
|Number of units||say||200||x £10,000|
|A's estimated future consideration to be received in 10 years time||£2,000,000|
|Present value of £1 in 10 years at 25% (risk factor substantial)||x 0.1074||£214,800 say £215,000|
|Gross proceeds of the original disposal.||= £315,000|
The base value of the “new” asset is therefore £215,000 and will be used to calculate gains against the actual future proceeds as and when they arise.
An alternative method of valuation may be to assume that “maximum” planning consents will be achieved and then to reflect the additional risk of this assumption in the PV £ adjustment. In this example:-
|1.||Immediate proceeds:-||50 acres||x £2,000 =||£100,000|
|2.||Chose in Action:-|
|A's right to receive||300 units||x £10,000 =||£3,000,000|
|Present value of £1 in 10 years at 30% (to reflect more substantial risk)||x 0.07254||£217,620 =||say £215,000|
|Gross Proceeds of the original disposal||£315,000|
It should be noted that the risk factor to be adopted should reflect the facts in each particular case.
All figures in the above example are illustrative only and the exact method of valuation to be adopted in any case is at the discretion of the DV concerned.