Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
, see all updates

Deferred consideration: shares and securities: example

This example illustrates the computation if an earn-out right is treated as a security by TCGA92/S138A but the taxpayer does not receive the deferred consideration he or she was expecting. In the example the consideration to be received is immediate cash, immediate shares and an unascertainable deferred 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. a) cash £170,000, plus
  2. b) 60,000 shares in P Ltd at market value of £2.10 each (total £126,000), plus
  3. c) the right to a payment of deferred consideration, the amount depending on profits of T Ltd for year 11, 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 £40,000. T Ltd does not meet its profit target and no shares or debentures are issued. The accounts year for year 11 are finalised in year 12.

COMPUTATIONS

A. IMMEDIATE CHARGEABLE GAIN

Cash received £170,000    
       
Less apportioned cost      
       
Cost x Cash  
    -–-–-–-–-–-–-–-–-–-–  
    Cash + shares + right  
       
£100,000 x £170,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-– £50,595
    £170,000 + £126,000 + £40,000  
      -–-–-–-—
Unindexed gain £119,405    
Less indexation £50,595 x 0.250 £12,649    
  -–-–-–-—    
Chargeable gain year 10 £106,756    
  -–-–-–-—    

B. COST OF SHARES IN P LTD

Apportioned cost      
       
£100,000 x £126,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-– £37,500
    £170,000 + £126,000 = £40,000  
Indexed rise to year 10      
£37,500 x 0.250 £9,375    
  -–-–-—-    
Indexed pool of expenditure £46,875    
  -–-–-—-    

C. COST OF NOTIONAL SECURITY

Apportioned cost      
       
£100,000 x £40,000  
    -–-–-–-–-–-–-–-–-–-–-–-–-–-–-– £11,905
    £170,000 + £126,000 = £40,000  
Indexed rise to year 10      
£11,905 x 0.250 £2,977    
  -–-–-—-    
Indexed pool of expenditure £14,882    
  -–-–-—-    

D. COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED

The accounts are finalised in year 12. At that point the amount which the vendor is to receive becomes ascertainable. He no longer has a right to receive deferred unascertainable consideration.

Proceeds Nil
   
Less cost £11,905
  -–-–-–-—
Allowable loss year 12 (£11,905)
  -–-–-–-—

From 30 November 1993, indexation is prevented from creating or increasing an allowable loss, see CG17700+.