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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Capital gains: non residents: illustrative agreements and TGCA92\S276

Although the making of an Illustrative Agreement constitutes a disposal by the UK licensee company, it is unlikely in practice that any gain will arise if it is made on, or soon after, the grant of the licence as the licence value will be nominal.

The collapse of an Agreement will also give rise to a chargeable occasion but the transfer of the full benefits of the oil won and saved back to the UK resident licensee company will often fall to be treated as no gain/no loss under TCGA92\S276(8).

Assuming the Agreement remains in force and the X-company owns all oil won and saved to which the licensee company is entitled under the licence, it is unlikely that the UK licensee company has any oil assets of value which, on disposal, might give rise to a capital gains charge.

However, a gain under TCGA92\S276 will arise on X-company in the event of a farm-out of part of the licence interest. This is because the company’s rights under the Agreement are unchanged - it still owns all the oil won to which the licensee company is entitled even though the latter’s entitlement has been reduced by the farm-out.