Solved
Start free trial

CG58065 | Deferred consideration: shares and securities: example

From HM Revenue & Customs · Capital Gains Manual

TCGA92/S138A

This example illustrates the most common type of transaction. The consideration to be received is immediate cash, immediate shares and an unascertainable deferred amount of shares.

NOTE From 6 April 2008 only companies and other concerns within the charge to Corporation Tax may be able to claim indexation allowance, see CG17200C.

FACTS

In year 0 V Ltd acquires all the shares in T Ltd for £100,000.

In year 10 V Ltd sells the shares in T Ltd at arm's length to P Ltd.

The consideration is

  • cash £500,000, and

  • 80,000 shares in P Ltd at market value of £2.25 each (total £180,000), and

  • the right to two payments of deferred consideration, the amount depending on future profits of T Ltd, to be satisfied only by an issue of shares in P Ltd.

The market value of the right to deferred consideration at the time of disposal is agreed by Shares and Assets Valuation at £300,000.

In year 11 shares in P Ltd to the value of £202,940 (73,000 shares at £2.78 each) are issued to V Ltd in part satisfaction of the right to deferred consideration. The market value of the remainder of the right in year 11 is agreed by Shares and Assets Valuation at £90,000.

In year 12 shares in P Ltd to the value of £118,440 (47,000 shares at £2.52 each) are issued in full satisfaction of the remainder of the right to deferred consideration.

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

COMPUTATIONS

A) IMMEDIATE CHARGEABLE GAIN

DescriptionCostMultipyCalculationAmount
Cash received---£500,000
Less apportioned costcostxcash-
------------------------------------
---cash + shares + right-
-----
-£100,000x£500,000-
----------------------------------------£51,020
---£500,000 + £180,000 + £300,000-
---------------
Unindexed gain---£448,980
less indexation 51,000 x 0.250---£12,755
---------------
CHARGEABLE GAIN YEAR 10---£436,225
---------------

B) COST OF SHARES IN P LTD

Apportioned costMultiplyCalculationAmount
----
£100,000x£180,000-
----------------------------------------£18,367 at year 0
--£500,000 + £180,000 + £300,000-
----
Indexed rise to year 10---
£18,367 x 0.250--£4,592
--------------
Indexed pool of expenditure--£22,959
--------------

C) COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED CONSIDERATION

Apportioned costMultiplyCalculationAmount
----
£100,000x£300,000-
------------------------------------------£30,613
--£500,000 + £180,000 + £300,000-
----
Indexed rise to year 10---
£30,613 x 0.250--£7,654
--------------
Indexed pool of expenditure--£38,267
--------------

D) COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED

Notional SecurityAmountCost of rightIndexed pool of expenditure
----
As at year 10-£30,613£38,267
----
Indexed rise to year 11---
£38,267 x 0.025--£957
--------------
---£39,224
Attributable to 73,000 shares in---
P Ltd issued in year 11---
£202,940---
-------------------------£21,208£27,174
£202,940 + £90,000---
----------------------
------------------------
Remainder at year 11-£9,405£12,050
Indexed rise to year 11---
£12,050 x 0.025--£302
--------------
---£12,352
Attributable to 47,000 shares in---
P Ltd issued year 12-£9,405£12,352

E) SHARES IN P LTD

P Ltd ShareholdingNo of sharesQualifyingIndexed pool ,of
--expenditureexpenditure
----
As at year 10---
(see computations at B)80,000£18,367£22,959
----
Indexed rise to year 11---
£22,959 x 0.025--£574
--------------
---£23,533
Additional 73,000---
shares acquired year 11---
(see computations at D)73,000£21,208£27,174
-------------------------------------
Pool at year 11153,000£39,575£50,707
-------------------------------------
Indexed rise to year 12---
£50,707 x 0.025--£1,268
---------------
---£51,975
Additional 47,000---
Shares acquired year 12---
(see computations at D)47,000£9,405£12,352
-------------------------------------
Pool at year 12200,000£48,980£64,327
-------------------------------------

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 (section 128(4) and TCGA92/S129).

B. COST OF SHARES IN P LTD

V Ltd has acquired shares in P Ltd and a `notional security' under the terms of section 138A. These are treated as two classes of shares. Together they form the `new holding' under TCGA92/S127 as applied by TCGA92/S135(3).

If the shares in P Ltd are not quoted the apportionment should be made by reference to market values at the date of a disposal of all or part of the new holding.

D. RIGHT TO UNASCERTAINABLE DEFERRED CONSIDERATION

The part satisfaction of the right to deferred consideration is a part disposal of the right. But because of section 138A it is treated as a conversion of securities within TCGA92/S132. Section 127 applies with the necessary adaptations to the part disposal and part of the base cost of the `notional security' is transferred to the holding of shares in P Ltd.

The procedure for obtaining valuations of the right to unascertainable deferred consideration is described at .

E. SHARES IN P LTD

The shares in P Ltd which are acquired go into the TCGA92/S104 holding of shares of the same class. The base cost and indexed pool of expenditure is calculated in accordance with B and C above.