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HMRC internal manual

Capital Gains Manual

Chargeable assets: intangible assets: contractual rights

The case of O’Brien v Benson’s Hosiery (Holdings) Ltd, 53TC241, established that in certain circumstances a contractual right is capable of being an asset for chargeable gains purposes.

In that case a company director paid a sum of money to be released from the remainder of the term of his service agreement. The company argued that its contractual rights under the terms of the service agreement were not an asset for CG purposes on the grounds that they could not be assigned or other-wise turned to account, see CG12010. This argument was rejected in the House of Lords:

“It was contended for the taxpayer that the rights of an employer under a contract of service were not ‘property’ nor an ‘asset’ of the employer, because they cannot be turned to account by transfer or assignment to another … this contention supposes a restricted view of the scheme of the imposition of the capital gains tax which the statutory language does not permit. If, as here, the employer is able to exact from the employee a substantial sum as a term of releasing him from his obligations to serve, the rights of the employer appear to me to bear quite sufficiently the mark of an asset of the employer, something which he can turn to account, notwithstanding that his ability to turn it to account is by a type of disposal limited by the nature of the asset” (Lord Russell of Killowen).

The court concluded that the bundle of rights to which the company was entitled under the terms of the contract was a form of property and, therefore, an asset within section 21(1) of TCGA 1992.

Guidance on the treatment of capital sums derived from contractual rights is given at CG13000.

Time of acquisition

The time of acquisition of a contractual right in relation to the original owner depends on the precise nature and terms of the contract. It will normally be the time when the contract was made or, if later, the time when the contractual right became exercisable. This may, for example, be triggered by a variation in the terms of the contract, which may amount to a discharge of the old contract and creation of a new one.

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Allowable costs of acquisition

The costs of acquisition should be determined by reference to the consideration, if any, given for the acquisition of the contractual right.

Where a contractual right is acquired otherwise than by way of a bargain made at arm’s length, section 17(1) of TCGA 1992 will not apply to treat it as having been acquired for a market value consideration where there is no corresponding disposal and either no consideration is given for the acquisition or the consideration given is less than the market value of the right (see section 17(2)(a) TCGA 1992 and CG14550).