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HMRC internal manual

Shares and Assets Valuation Manual

Capital Gains Tax procedures: the Valuation of the Right to Receive Deferred Consideration (Marren v Ingles Cases or ‘Earn-Outs’)

These valuations arise when a company is sold and payment of part of the purchase price is deferred. Usually the deferred consideration is payable in tranches and is calculated by reference to profits (typically) up to 3 years following the original sale agreement. In such cases payment of each tranche constitutes a part disposal of the right to deferred consideration and the normal part disposal rules apply.

SAV is asked to agree not only the value of the deferred consideration on the original sale (initial right) but also the value of the remaining rights to deferred consideration immediately after the payment of each tranche (residual right).

Where a series of payments is received this will form a series of part-disposals. The Inspector therefore needs to know the value of the remaining right at each date of payment to calculate the CGT payable. The Inspector’s instructions are contained in the CG Manual at CG14850 - 15130 and CG58000 - 58206.

When risk assessing this type of case you should bear in mind that Entrepreneurs Relief is only available on any initial right, taxed with the initial proceeds. Subsequent disposals are not disposals of a business asset and are not eligible for Entrepreneurs Relief.

  Additional Guidance: SVM150000