CG58071 - Deferred consideration: shares and securities: example
This example illustrates the operation of Section 138A TCGA 1992
if the deferred consideration is to be satisfied by an issue of
QCBs. In the example the consideration to be received is immediate
cash, immediate shares and an unascertainable deferred amount of
debentures which are QCBs.
All events take place on or after 26 November 1996.
Illustrative indexation factors have been provided for the purposes
of this example only. As regards the freezing of indexation
allowance for Capital Gains Tax purposes from 1998-99 onwards, see
CG50607.
FACTS
- In year 0 a taxpayer acquires all the shares in T Ltd for £100,000.
- In year 10 the taxpayer sells all the shares in T Ltd at arm's length to P Ltd.
The consideration is
- cash £200,000, plus
- 80,000 shares in P Ltd at market value of £2.00 each
(total £160,000), plus
- the right to two payments of future consideration, the amount depending on future profits of T Ltd, to be satisfied only by an issue of debentures which are QCBs by P Ltd.
The market value of the right to deferred consideration at the
time of disposal is agreed by Shares and Assets Valuation at
£90,000.
In year 11 QCBs in P Ltd to the value of £75,000 are
issued to the taxpayer in part satisfaction of the right to
deferred consideration. The market value of the remainder of the
right at year 11 is agreed by Shares and Assets Valuation at
£30,000.
In year 12 QCBs in P Ltd to the value of £32,000 are
issued in full satisfaction of the remainder of the right to
deferred consideration.
All of the conditions are satisfied and the earn-out right is
treated as a security by TCGA92/S138A.
COMPUTATIONS
A. IMMEDIATE CHARGEABLE GAIN
| Cash received | £200,000 | ||
| Less apportioned cost | |||
| Cost | x | Cash | |
| ------------------------------ | |||
| Cash + shares + right | |||
| £100,000 | x | £200,000 | |
| -------------------------------------------- | £44,444 | ||
| £200,000 + £160,000 + £90,000 | |||
| ------------- | |||
| Unindexed gain | £155,556 | ||
| Less indexation £44,444 x 0.250 | £11,111 | ||
| ------------- | |||
| Chargeable gain year 10 | £144,445 | ||
B. COST OF SHARES IN P LTD
| Apportioned cost | |||
| £100,000 | x | £160,000 | |
| -------------------------------------------- | £35,556 at year 0 | ||
| £200,000 = £160,000 = £90,000 | |||
| Indexed rise to year 10 | |||
| £35,556 x 0.250 | £8,889 | ||
| ----------- | |||
| Indexed pool of expenditure | £44,445 | ||
| ----------- | |||
C. COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED
CONSIDERATION
| Apportioned cost | |||
| £100,000 | x | £90,000 | |
| -------------------------------------------- | £20,000 | ||
| £200,000 + £160,000 + £90,000 | |||
| Indexed rise to year 10 | |||
| £20,000 x 0.250 | £5,000 | ||
| ----------- | |||
| Indexed pool of expenditure | £25,000 | ||
| ----------- | |||
D. COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED
| Notional Security | Cost of | Indexed pool of | |
| Right | Expenditure | ||
| As at year 10 | £20,000 | £25,000 | |
| Indexed rise to year 11 | |||
| £25,000 x 0.025 | £625 | ||
| ----------- | |||
| £25,625 | |||
| Attributable to debentures in | £75,000 | ||
| P Ltd issued year 11 | -------------------------- | £14,286 | £18,304 |
| £75,000 + £30,000 | |||
| ----------- | ----------- | ||
| Remainder at year 11 | £5,714 | £7,321 | |
| Indexed rise to year 12 | |||
| £7,321 x 0.025 | £183 | ||
| ----------- | |||
| £7,504 | |||
| Attributable to debentures in P Ltd issued year 12 | £5,714 | £7,504 | |
E. COMPUTATION OF HELD OVER GAIN ON DEBENTURE
| Market value of part of notional security before | ||
| exchange year 11 ( = value of debenture) | £75,000 | |
| Apportioned cost | £14,286 | |
| Indexation (year 0 to year 11) | £4,018 | £18,304 |
| ----------- | ----------- | |
| Held over gain | £56,696 | |
| ----------- | ||
| Market value of part of notional security before | ||
| exchange year 12 ( = value of debenture) | £32,000 | |
| Apportioned cost | £5,714 | |
| Indexation (year 0 to year 12) | £1,790 | £7,504 |
| ---------- | ---------- | |
| Held over gain | £24,496 | |
| ----------- | ||
EXPLANATION
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 (TCGA92/S128 (4) and TCGA92/S129).
B. COST OF SHARES IN P LTD
The vendor has acquired shares in P Ltd and a notional
security under the terms of TCGA92/S138A. These are treated as two
classes of shares. Together they form the new holding under
TCGA92/S127 as applied by TCGA92/S135 (3).
C. RIGHT TO DEFERRED UNASCERTAINABLE CONSIDERATION
The right to the deferred consideration constitutes the new
holding under TCGA92/S127 by virtue of TCGA92/S135 (3) and
TCGA92/S138A.
D. AND E COMPUTATION OF THE HELD OVER GAIN
When QCBs are received in satisfaction of the right Section
116(10) applies to the exchange of the remaining part of the right
to deferred consideration for the QCBs. The held over gain on the
QCB is calculated by reference to the market value of the
right.
