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HMRC internal manual

Capital Gains Manual

Deferred consideration: shares/securities: ascertainable/unascertainable


An agreement for the sale of shares or debentures in a company may provide for an amount of consideration to be paid at a later date in an amount which is unascertainable at the date of sale.  Often the amount of the later payment will depend on the future profits of the company being sold.  This arrangement may be referred to as an ‘earn-out’.  Sometimes the shareholders in the company being acquired are also directors or employees who will stay with the company after it changes hands.

TCGA92/S138A(1) defines an “earn-out right” as so much of any right conferred on a person as is

  • the whole or part of the consideration for the transfer by that person of shares or debentures of a company;
  • a right to be issued with shares or debentures of another company;
  • such that the value or quantity of the shares or debentures to be issued in pursuance of the right is unascertainable (see CG58015) at the time when the right is conferred; and
  • not capable of being discharged otherwise than by the issue of shares or debentures.

Vendor placings

Some share sale agreements provide for the newly issued shares or debentures to be sold immediately for cash, an arrangement called a vendor placing.  Provided the right to deferred consideration can only be satisfied by an issue of shares or debentures section 138A can still apply even if those shares or debentures are to be sold in a vendor placing.