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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Hire purchase agreements

You may be familiar with hire purchase agreements which are common in every day commercial life.

The agreement, or series of agreements, will normally include:

  • an agreement which allows the eventual purchaser of the asset to use it for a specified period (called the hire period)
  • an agreement that the purchaser pays an initial sum at the beginning of the hire period (called the deposit)
  • an agreement that the purchaser pays regular sums during the hire period (called the hire charge) and
  • an agreement that the purchaser takes ownership of the asset at the end of the hire period.

CG12880+ tell you about cases where you have a series of agreements.

It is the existence of the final agreement which CG12860 tells you about which distinguishes a Hire Purchase agreement from a Sale agreement. It produces a different legal result since under a Hire Purchase agreement, legal ownership is retained by the vendor until the end of the hire period. In the case of a Sale agreement, legal ownership will pass when the contract becomes final.

TCGA92/S27

For Capital Gains Tax purposes, the vendor is regarded as having disposed of the asset at the beginning of the hire period, TCGA92/S27. This produces the same result for both HP agreements and sale agreements. There are special rules which apply in cases where the purchaser fails to complete the payments or the asset is repossessed. CG12870 tells you about these.

Lyon v Pettigrew

CG12860 tells you that, for Capital Gains Tax purposes, the vendor is treated as disposing of the asset at the beginning of the hire period. This enables us to apply the normal rules involving deferred consideration. These bring in the full amount of the capital consideration at the beginning of the hire period. This approach was supported by the Courts in Lyon v Pettigrew (58TC452).

Indexation Allowance

The date of disposal of the asset is the beginning of the hire period, see CG12860. So any indexation allowance under TCGA92/S53 - TCGA92/S55 is calculated:

  • for the vendor up to the date on which the hire period began

and

  • for the purchaser from that date.

CG17200+ tell you about indexation generally. Where the disposal occurs on or after 30 November 1993, see CG17700+

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.