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Capital Gains Manual

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Deferred consideration: shares and securities: example

This example illustrates the effect of TCGA92/S138A if the deferred consideration includes QCBs and shares. In the example the consideration to be received is immediate cash, immediate shares and a deferred unascertainable amount of shares and debentures.

All events take place on or after 26 November 1996. Illustrative indexation factors have been provided for the purposes of this example only. Indexation allowance does not apply to Capital Gains Tax disposals from 2008-09.

FACTS 

  • In year 0 a taxpayer acquires all the shares in T Ltd for £100,000.
  • In year 10 the taxpayer sells the shares in T Ltd at arm’s length to P Ltd.

The consideration is

  1. cash £100,000, plus
  2. 50,000 shares in P Ltd at market value of £3.00 each (total £150,000), plus
  3. the right to a payment of deferred consideration, the amount depending on future profits of T Ltd, to be satisfied only by an issue of shares in or debentures of P Ltd.

The market value of the right to deferred consideration at the time of disposal is agreed by Shares and Assets Valuation at £200,000.

In year 11 shares in P Ltd to the value of £90,000 (30,000 shares at £3.00 each) and debentures in P Ltd to the value of £120,000 are issued in full satisfaction of the right to deferred consideration.

P Ltd is a company whose shares are quoted on the Stock Exchange. All of the debentures issued are QCBs. All of the conditions are satisfied and the earn-out right is treated as a security by TCGA92/S138A.

COMPUTATIONS

A. IMMEDIATE CHARGEABLE GAIN

Cash received £100,000    
       
Less apportioned cost      
       
Cost x cash  
    -–-–-–-–-–-–-–-–-–-–-–  
    Cash + shares + right  
       
£100,000 x £100,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-— £22,222
    £100,000 + £150,000 + £200,000  
      -–-–-–-–
Unindexed gain £77,778    
Less indexation £22,222 x 0.250 £5,556    
  -–-–-—-    
Chargeable gain year 10 £72,222    
  -–-–-—-    

B. COST OF SHARES IN P LTD

Apportioned cost      
       
£100,000 x £150,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-– £33,333 at year 0
    £100,000 + £150,000 + £200,000  
Indexed rise to year 10      
£33,333 x 0.250 £8,334    
  -–-–-—-    
Indexed pool of expenditure £41,667    
  -–-–-—-    

C. COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED CONSIDERATION

Apportioned cost      
       
£100,000 x £200,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-–  
    £100,000 + £150,000 + £200,000 £44,445
Indexed rise to year 10      
£44,445 x 0.250 £11,112    
  -–-–-—-    
Indexed pool of expenditure £55,557    
  -–-–-—-    

D. COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED

COMPUTATION OF HELD OVER GAIN ON DEBENTURE

Market value of part of notional security before        
         
Exchange year 11 ( = value of debenture) £120,000      
Apportioned cost        
£44,445 x £120,000    
    -–-–-–-–-–-–-–-–-—- £25,397  
    £120,000 + £90,000    
Indexation (year 0 to year 11)        
£25,397 x 0.281 £7,136 £32,533    
      -–-–-— -–-–-—-
Held over gain   £87,467    
        -–-–-—-

E. COMPUTATION OF COST OF SHARES ISSUED

Cost £44,445 - £25,397 £19,048
   
Indexed rise to year 11  
£19,048 x 0.281 £5,352
  -–-–-—-
Indexed pool of expenditure £24,400
  -–-–-—-

F. SHARES IN P LTD

P Ltd Shareholding No of Qualifying Indexed pool of
       
  Shares Expenditure Expenditure
As at year 10 (see computations at B) 50,000 £33,333 £41,667
Indexed rise to year 11     £1,042
£41,667 x 0.025     -–-–-—-
      £42,709
Additional 30,000 shares acquired year 11      
(see computations at E) 30,000 £19,048 £24,400
  -–-–-— -–-–-–-– -–-–-–-–
Pool at year 11 80,000 £52,381 £67,109
  -–-–-— -–-–-–-– -–-–-–-–

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 (TCGA92/S128 (4) and TCGA92/S129).

B. COST OF SHARES IN P LTD

The vendor has acquired shares in P Ltd and a `notional security’ under the terms of TCGA92/S138A. These are treated as two classes of shares. Together they form the `new holding’ under TCGA92/S127 as applied by TCGA92/S135 (3).

C. RIGHT TO UNASCERTAINABLE DEFERRED CONSIDERATION

The right to the deferred consideration constitutes the new holding under TCGA92/S127 by virtue of TCGA92/S135 (3) and TCGA92/S138A.

D. COMPUTATION OF THE HELD-OVER GAIN

When QCBs are received in satisfaction of the right Section 116(10) applies to the exchange of the remaining part of the right to deferred consideration for the QCBs. The held over gain on the QCB is calculated by reference to the market value of the right.