CG58065 - Deferred consideration: shares and securities: example
TCGA92/S138A
This example illustrates the most common type of transaction. The consideration to be received is immediate cash, immediate shares and an unascertainable deferred amount of shares.
NOTE From 6 April 2008 only companies and other concerns within the charge to Corporation Tax may be able to claim indexation allowance, see CG17200C.
FACTS
In year 0 V Ltd acquires all the shares in T Ltd for £100,000.
In year 10 V Ltd sells the shares in T Ltd at arm's length to P Ltd.
The consideration is
- cash £500,000, and
- 80,000 shares in P Ltd at market value of £2.25 each (total £180,000), and
- the right to two payments of deferred consideration, the amount depending on future profits of T Ltd, to be satisfied only by an issue of shares in P Ltd.
The market value of the right to deferred consideration at the time of disposal is agreed by Shares and Assets Valuation at £300,000.
In year 11 shares in P Ltd to the value of £202,940 (73,000 shares at £2.78 each) are issued to V Ltd in part satisfaction of the right to deferred consideration. The market value of the remainder of the right in year 11 is agreed by Shares and Assets Valuation at £90,000.
In year 12 shares in P Ltd to the value of £118,440 (47,000 shares at £2.52 each) are issued in full satisfaction of the remainder of the right to deferred consideration.
P Ltd is a company whose shares are quoted on the Stock Exchange. All of the conditions are satisfied and the earn-out right is treated as a security by TCGA92/S138A.
COMPUTATIONS
A) IMMEDIATE CHARGEABLE GAIN
| Description | Cost | Multipy | Calculation | Amount |
|---|---|---|---|---|
Cash received | - | - | - | £500,000 |
Less apportioned cost | cost | x | cash | - |
- | - | - | -------------------------------- | - |
- | - | - | cash + shares + right | - |
- | - | - | - | - |
- | £100,000 | x | £500,000 | - |
- | - | - | ------------------------------------- | £51,020 |
- | - | - | £500,000 + £180,000 + £300,000 | - |
- | - | - | - | ----------- |
Unindexed gain | - | - | - | £448,980 |
less indexation 51,000 x 0.250 | - | - | - | £12,755 |
- | - | - | - | ----------- |
CHARGEABLE GAIN YEAR 10 | - | - | - | £436,225 |
- | - | - | - | ----------- |
B) COST OF SHARES IN P LTD
Apportioned cost | Multiply | Calculation | Amount |
|---|---|---|---|
- | - | - | - |
£100,000 | x | £180,000 | - |
- | - | -------------------------------------- | £18,367 at year 0 |
- | - | £500,000 + £180,000 + £300,000 | - |
- | - | - | - |
Indexed rise to year 10 | - | - | - |
£18,367 x 0.250 | - | - | £4,592 |
- | - | - | ----------- |
Indexed pool of expenditure | - | - | £22,959 |
- | - | - | ----------- |
C) COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED CONSIDERATION
Apportioned cost | Multiply | Calculation | Amount |
|---|---|---|---|
- | - | - | - |
£100,000 | x | £300,000 | - |
- | - | ---------------------------------------- | £30,613 |
- | - | £500,000 + £180,000 + £300,000 | - |
- | - | - | - |
Indexed rise to year 10 | - | - | - |
£30,613 x 0.250 | - | - | £7,654 |
- | - | - | ----------- |
Indexed pool of expenditure | - | - | £38,267 |
- | - | - | ----------- |
D) COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED
Notional Security | Amount | Cost of right | Indexed pool of expenditure | |
|---|---|---|---|---|
- | - | - | - | |
As at year 10 | - | £30,613 | £38,267 | |
- | - | - | - | |
Indexed rise to year 11 | - | - | - | |
£38,267 x 0.025 | - | - | £957 | |
- | - | - | ----------- | |
- | - | - | £39,224 | |
Attributable to 73,000 shares in | - | - | - | |
P Ltd issued in year 11 | - | - | - | |
£202,940 | - | - | - | |
------------------------ | - | £21,208 | £27,174 | |
£202,940 + £90,000 | - | - | - | |
| - | - | ---------- | ---------- | |
- | - | ----------- | ----------- | |
Remainder at year 11 | - | £9,405 | £12,050 | |
Indexed rise to year 11 | - | - | - | |
£12,050 x 0.025 | - | - | £302 | |
- | - | - | ----------- | |
- | - | - | £12,352 | |
Attributable to 47,000 shares in | - | - | - | |
P Ltd issued year 12 | - | £9,405 | £12,352 | |
E) SHARES IN P LTD
P Ltd Shareholding | No of shares | Qualifying | Indexed pool ,of |
|---|---|---|---|
- | - | expenditure | expenditure |
- | - | - | - |
As at year 10 | - | - | - |
(see computations at B) | 80,000 | £18,367 | £22,959 |
- | - | - | - |
Indexed rise to year 11 | - | - | - |
£22,959 x 0.025 | - | - | £574 |
- | - | - | ----------- |
- | - | - | £23,533 |
Additional 73,000 | - | - | - |
shares acquired year 11 | - | - | - |
(see computations at D) | 73,000 | £21,208 | £27,174 |
- | ------------ | ----------- | ------------- |
Pool at year 11 | 153,000 | £39,575 | £50,707 |
- | ------------ | ----------- | ------------- |
Indexed rise to year 12 | - | - | - |
£50,707 x 0.025 | - | - | £1,268 |
- | - | - | ------------ |
- | - | - | £51,975 |
Additional 47,000 | - | - | - |
Shares acquired year 12 | - | - | - |
(see computations at D) | 47,000 | £9,405 | £12,352 |
- | ------------ | ------------ | ------------ |
Pool at year 12 | 200,000 | £48,980 | £64,327 |
- | ------------ | ------------ | ------------ |
EXPLANATION
The statutory reasons for the method of computation are;
A. CASH RECEIVED
The cash received is treated as a part-disposal of the old holding of T Ltd shares under TCGA92/S128(3). The apportionment of the base cost of the old holding is made on the basis of market value at the date of disposal (section 128(4) and TCGA92/S129).
B. COST OF SHARES IN P LTD
V Ltd has acquired shares in P Ltd and a `notional security' under the terms of section 138A. These are treated as two classes of shares. Together they form the `new holding' under TCGA92/S127 as applied by TCGA92/S135(3).
If the shares in P Ltd are not quoted the apportionment should be made by reference to market values at the date of a disposal of all or part of the new holding.
D. RIGHT TO UNASCERTAINABLE DEFERRED CONSIDERATION
The part satisfaction of the right to deferred consideration is a part disposal of the right. But because of section 138A it is treated as a conversion of securities within TCGA92/S132. Section 127 applies with the necessary adaptations to the part disposal and part of the base cost of the `notional security' is transferred to the holding of shares in P Ltd.
The procedure for obtaining valuations of the right to unascertainable deferred consideration is described at .
E. SHARES IN P LTD
The shares in P Ltd which are acquired go into the TCGA92/S104 holding of shares of the same class. The base cost and indexed pool of expenditure is calculated in accordance with B and C above.