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HMRC internal manual

Capital Gains Manual

Contingent liabilities: indemnities

An indemnity is not the same as a warranty or representation. It is not a statement about the state or nature of the asset being sold but a promise to make good a loss suffered by the purchaser in specific instances. The advantage of an indemnity to the purchaser is that it gives them a quicker and simpler method of getting payment if they suffer a loss. For example the vendor may give a warranty against unexpected pre-sale tax liabilities of a company. They may also indemnify the purchaser against such liabilities. To claim under the warranty the purchaser would have to show there was a breach of the warranty and that they have suffered a quantified loss arising from that breach. To claim under the indemnity the purchasers would only have to show that the liability had arisen and it was covered by the indemnity.

An indemnity is a contingent liability but it is not a warranty or representation. Strictly it does not fall within TCGA92/S49 and the consideration received by the vendor giving an indemnity should take account of the indemnity, see CG14809. But paragraph 13 of ESC/D33 says that in practice TCGA92/S49 can apply to payments under an indemnity made by the vendor to the purchaser. This includes cases where a payment is made by a vendor company under an indemnity, but the gain or loss has been treated as accruing to a different company following an election under TCGA92/S171A (CG45355+).

There is further guidance on the treatment of warranty and indemnity payments in the hands of the purchaser at CG13010.