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HMRC internal manual

Capital Gains Manual

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


For rights conferred before 10 April 2003 a person who had been granted an earn-out right that met the conditions referred to in CG58022 has to make an election for it to be treated as a security. However, FA03/S162 (2) provides that where an election has been made under TCGA92/S279A, so that an allowable loss on a disposal of an earn-out right conferred before 10 April 2003 is treated as accruing in a year before the disposal, no election may then be made under TCGA92/S138A. For guidance on elections under TCGA92/S279A see CG15080+.

You may meet a case where, by a variation in the sale agreement or otherwise, the original earn-out right is replaced by a new right with different terms, but involving an issue of shares or debentures by the same company. Provided certain conditions are satisfied, which broadly correspond to those for the original TCGA92/S138A election, the vendor can make a fresh election in respect of the new right under TCGA92/S138A (4) if the replacement right is conferred before 10 April 2003. See CG58089.

An election may also be made when the purchasing company is itself taken over and the vendor’s rights are affected. Guidance on this is at CG58088.

For rights conferred on or after 10 April 2003 the position is reversed and an earn-out right is treated as a security automatically and without any need for an election when the conditions described in CG58022 or CG58089 are met. Instead taxpayers can elect not to have their earn-out rights treated as securities if they wish, under TCGA92/S138 (2A) or (4A).

An election, whether in or out of assumed security status, is irrevocable - TCGA92/S138A (6). Guidance on how TCGA92/S138A elections should be made and the time limit for elections is at CG58028.