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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Deferred consideration: shares and securities: TCGA92/S138A: conditions and consequences


As CG58001 explains, the purpose of TCGA92/S138A is to allow a right to deferred unascertainable consideration that will be satisfied by issuing shares or debentures to be treated as a security, so that the share reorganisation rules can apply.

TCGA92/S138A (2) lays down the conditions that have to be met before the legislation can apply.

  • Firstly there has to be an ‘earn-out right’ as defined in TCGA92/S138A (1) - see CG58011.
  • Secondly, the exchange of the original shares or debentures for the right must have been such that TCGA92/S135 would have applied if the consideration for the transaction had been shares or debentures issued by the acquiring company, rather than that right. This means it is necessary that such a transaction would have met the conditions of TCGA92/S135 (1) and that the anti-avoidance provisions of TCGA92/S137 would not have operated to prevent Section 135 applying. In determining whether this condition is met the guidance at CG52660+ should be followed and the inspector dealing with the accounts of the company whose shares or debentures are being sold consulted if necessary.
  • For rights conferred before 10 April 2003, an election has to be made for the right to be treated as a security. For rights conferred on or after 10 April 2003 the position has been reversed and the section 138A treatment of an earn-out right as a security is automatic when the conditions are met unless the taxpayer elects for the treatment not to apply. See CG58023 regarding elections.

If those conditions are met the TCGA has effect, for all persons who hold the right, in the manner described in TCGA92/S138A (3). That subsection provides that the right to receive the deferred consideration is assumed to be a security of the purchasing company within the meaning of TCGA92/S132 (3)(b), but not a qualifying corporate bond. So that the issue of shares or debentures in satisfaction of the right counts as a conversion of the right into the shares or debentures issued. These assumptions allow the conversion of securities provision in TCGA92/S132, or the QCB rules in TCGA92/S116, to apply so that no gain or loss crystallises before there is a disposal of the shares or debentures received by way of the earn-out right.