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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Sale of income by an individual in exchange for capital: capital amount

S777-S779, S784 Income Tax Act 2007

Capital amount defined

‘Capital amount’ is defined in the sale of income legislation as any amount, in money or money’s worth, which does not otherwise fall to be included in any computation of income for the purposes of the Tax Acts.

Capital amount receivable by someone other than the individual

The legislation also catches the case in which the capital amount is receivable not by the individual whose activities are being exploited but by some other person. In such a case, the individual who relinquishes the future income remains the person who is chargeable.

Postponement of charge

Where the capital amount consists of property or a right the value of which derives substantially the whole of its value from the individual’s own activities (for example the shares in his service company), no charge under the sale of income legislation arises when the amount becomes receivable. The charge is postponed until that particular piece of property or that right is sold or otherwise realised.

Capital amount attributable to value as going concern

Innocent transactions are excluded from the sale of income legislation where the capital amount is obtained from the disposal of assets (including goodwill) of a profession or vocation or a share in a partnership carrying on a profession or vocation if the value of what is disposed of is attributable to the value of the profession or vocation as a going concern, and not attributable to the value of an individual’s future earnings.

Similarly, transactions are excluded from the legislation where the capital amount is obtained from the disposal of shares in a company and the value of what is disposed of is attributable to the value of the company’s business (or of the value of the business of any other company in which the company in question holds shares directly or indirectly) as a going concern.

For example, an individual entering into an existing firm as a new partner may pay a capital sum to the existing partners. In as much as the new partner might not become immediately useful to the firm, it might be said that for a short period income or profits which were attributable to the activities of the existing partners were being allocated to the incoming partner, and that a part of the ‘capital amount’ received by the existing partners was so received because the incoming partner was exploiting the activities of the existing partners. The above provisions make clear that such a transaction is excluded from the sale of income legislation.