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Capital Gains Manual

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Deferred consideration: shares and securities: example

This example illustrates the operation of paragraph 4 of ESC/D27.

Facts.

  • April 1983 a taxpayer acquires all the shares in T Ltd for £100,000.
  • January 1988 the taxpayer sells all the shares in T Ltd at arm’s length to P Ltd.

The consideration is the right to two payments of deferred consideration, the amounts depending on future profits of T Ltd, to be satisfied either in cash or in shares in P Ltd, with a maximum of £300,000 for each payment.

In April 1989 the taxpayer receives cash of £200,000 in part satisfaction of the right to deferred consideration.

In April 1990 the taxpayer receives shares to the value of £180,000 (60,000 shares at £3.00) and cash of £60,000 in full satisfaction of the remainder of the right to deferred consideration.

The taxpayer claims relief under the fourth paragraph of ESC/D27 and all of the conditions are satisfied.

COMPUTATIONS

A) IMMEDIATE CHARGEABLE GAIN

  1. Initial computation
Consideration (maximum) £600,000
   
Less cost £100,000
  -–-–-–-—
Unindexed gain £500,000
Less indexation £100,000 x 0.226 £22,600
  -–-–-–-—
Chargeable gain 1987- 88 £477,400
  -–-–-–-—
  1. First revision to computation
Consideration  
   
(200,000 + maximum on 2n d instalment) £500,000
Less cost £100,000
  -–-–-–-—
Unindexed gain £400,000
Less indexation £22,600
  -–-–-–-—
Chargeable gain 1987- 88 £377,400
  -–-–-–-—
  1. Final revision to computation
Cash consideration     £260,000
       
Less apportioned cost      
       
Cost x cash  
    -–-–-–-–-–-—-  
    cash + shares  
       
£100,000 x £260,000  
    -–-–-–-–-–-–-–-–-—- £59,091
    £260,000 + £180,000  
      -–-–-–-—
Unindexed gain     £200,909
Less indexation £59,091 x 0.226     £13,355
      -–-–-–-—
Chargeable gain 1987- 88     £187,554
      -–-–-–-—

B) COST OF SHARES IN P LTD

Apportioned cost £100,000 - £59,091 = £40,909 at April 1983.

This forms the base cost and date of acquisition of the 60,000 shares in P Ltd acquired by the vendor in April 1990.

EXPLANATION

As the deferred consideration included a cash alternative the vendor would not have been entitled to concessional relief under the main body of ESC/D27. The vendor was entitled to relief under the fourth paragraph of the concession because the right was acquired before 26 April 1988 and a maximum amount was specified. The concession allows relief under TCGA92/S135 as if the consideration was ascertainable in these circumstances. The computation is made assuming that the maximum amount will be received and then revised when the actual amounts are ascertained.