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HMRC internal manual

Capital Gains Manual

Deferred consideration: shares and securities: later payments cash only

TCGA92/S138A

TCGA92/S138A cannot apply unless the right to receive unascertainable deferred consideration can be discharged only by the issue of new shares or debentures.  You will see cases where on a share sale unascertainable deferred consideration is to be paid in the form of cash, shares or debentures or any combination of these three.  If the unascertainable deferred consideration may possibly be paid in cash, or will only be paid in cash, the tax position is dealt with at [CG14950](https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14950)+.  The right cannot then be treated as a security by section 138A.

You will also see cases where customers are offered the choice that their unascertainable deferred consideration may be paid either in cash, shares or debentures, in circumstances where the customer’s choice becomes one of the terms of the contract.  An election is possible in cases where the right to receive unascertainable deferred consideration held by the customer may under the terms of the relevant contract be settled only by the issue of shares or debentures.  Those who choose the cash alternative may not elect.

You may also come across cases where a part only of the unascertainable deferred consideration is to be satisfied by the issue of shares or debentures, and a part only by cash.  Section 138A can apply to the part that is to be settled by shares or debentures, see the example at CG58070.

EXAMPLE

Shareholders in company A sell their shares for consideration comprising the right to future payments depending on the results of company A in each of the four years following the sale.  Those rights are

Year 1, either cash or shares in company B (at the option of either company B or the vendor shareholders in company A) to the value of the amount by which the profits for year one exceed a stated amount.

Year 2, either shares in or debentures (which are Qualifying Corporate Bonds (QCB)) of company B to the value of the amount by which the profits for year 2 exceed a stated amount.

Year 3, cash or shares in or debentures (which are QCBs) of company B to the value of the amount by which the profits of year 3 exceed a stated amount.  The vendor shareholders have to decide in what form they will take the deferred consideration for this year (all cash, all shares or all debentures) before the contract for sale becomes final.  Having decided they may not change their mind at a later date.

Year 4, in cash and shares in company B to the value of the amount by which the profits for year 4 exceed a stated amount.  One half of the unascertainable deferred amount will be in cash and one half in shares.

All of the other conditions of section 138A are met.

Year 1, the existence of the cash alternative means that section 138A cannot apply.  It does not matter whether the option to satisfy the deferred consideration other than by an issue of shares or debentures is available to the vendor shareholders or the company that granted the right.  Or if a particular vendor shareholder in the event actually receives shares.  The possibility of receiving the unascertainable deferred consideration in cash, under the terms of the vendor shareholders’ contract with company B, is sufficient to prevent the legislation applying.

Year 2, section 138A can apply in respect of the unascertainable deferred consideration.  There is no cash alternative.

Year 3, section 138A can apply to those vendor shareholders who choose either the share or the debenture option, but not to those who choose the cash option.

Year 4, section 138A can apply in respect of the half of the unascertainable deferred consideration to be settled in shares.  It cannot apply in respect of the amount to be settled in cash but this does not stop it applying in respect of the part to be settled only in shares.