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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Contingent liabilities: the effect of TCGA92 S49


TCGA92/S49 provides that, in the first instance, no account is taken of the contingent liability in computing the capital gain. But if the contingent liability becomes enforceable and is enforced the payment can be deducted from the consideration received and the gain or loss recomputed. See CG14807 if the payment exceeds the original consideration received.

You make the necessary adjustment by discharge or repayment of tax or by increasing losses to be carried forward.

The test is a factual one. If any such contingent liability

  • becomes enforceable, and
  • is being, or has been enforced

a claim may be made for an appropriate adjustment. The time limit in TMA70/S43 applies.

A taxpayer sells their shares in a private company for £100,000 and agrees to make a payment of up to £70,000 if a particular product proves to be defective. The warranty becomes enforceable and the taxpayer pays £70,000. The shares cost £40,000.

The original computation would be

  Disposal proceeds 100,000
LESS Cost 40,000
  Unindexed gain 60,000
LESS indexation (say) 10,000
After the warranty payment the computation becomes    
  Disposal proceeds £100,000-£70,000 £ 30,000
LESS Cost £ 40,000
  Allowable loss 10,000

The tax due or paid on the original assessment should be discharged or repaid.

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+.