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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Deferred consideration: shares/securities: Notifications made prior to royal assent

FA97/S89 (8)

Section 89(7) FA 1997 does not prevent Section 138A TCGA 1992 from being taken, for the purposes of applying TCGA to any disposal on or after 26 November 1996, to have had effect in relation to

  1. any disposal before 26 November 1996 on which, by virtue of any of the enactments specified in TCGA92/S35 (3)(d) neither a gain nor a loss accrued,
  2. any deemed disposal before 26 November 1996 to which a gain or loss falls to be calculated in accordance with TCGA92/S116 (10)(a) (QCBs), or
  3. any transaction before 26 November 1996 that would have fallen to be treated as a disposal but for TCGA92/S127.

The effect of this provision is that capital gains charges are preserved in the following sequences of transactions by TCGA92/S138A independently of ESC/D27.

  • The vendor of an original holding of shares sold under an earn-out agreement makes a claim under ESC/D27, and before 26 November 1996 receives QCBs in satisfaction of the earn-out right. The receipt of the QCBs is the occasion of a deemed disposal, before 26 November 1996, for the purposes of TCGA92/S116 (10)(a). If the QCBs are disposed of on or after 26 November 1996, any gain up to the time the QCBs are received (including any gain attributable to the original holding of shares) crystallises for tax purposes under TCGA92/S116 (10)(b) and TCGA92/S138A when the QCBs are disposed of.
  • The vendor of an original holding of shares sold under an earn-out agreement makes a claim under ESC D27, and before 26 November 1996 receives shares in the purchasing company in satisfaction of the earn-out right. The vendor transfers the shares in the purchasing company at no gain/no loss to the vendor’s spouse also before 26November 1996. If the transferee spouse makes a third party disposal of the shares on or after 26 November 1996, the gain in the hands of the transferee spouse is computed by reference to the cost, to the transferor spouse, of the original holding of shares sold under the earn-out agreement. So any gain or loss on the original shares is effectively rolled over, firstly into the notional security represented by the earn-out right, and secondly into the shares held by the spouse making the third party disposal.