OT30052 - Capital Gains

Undeveloped Area. Licensed Area.

The exploration and appraisal work must be carried out "in an area which is, or forms part of, the licensed area in relation to the licence disposed of" (modified by TCGA92\s196(4) if appropriate). The provision does not cover a case where the consideration given involves a work programme outside the licensed area for which the farmer-in will acquire an interest.

However TCGA92\s194(3) relaxes the rule in relation to certain composite transactions. If two or more licences, each relating to an undeveloped area are disposed of under a single transaction for a consideration consisting of, or including, a work programme obligation, the licensed areas are looked at collectively. As long as the work is carried out in any of those areas, the work programme obligation is deemed to have Nil value.

There may be cases where the work programme includes seismic to be shot over an area extending outside the licensed area. That part of the consideration is not deemed to have nil value. But establishing the value by reference to the related increase in the value of the farmer outs retained interest is unlikely to be worthwhile in many cases. Accordingly, on a purely practical and without prejudice basis, attempts should not normally be made to attach a positive consideration to seismic to be shot primarily within, but partly outside, the licensed area to which the disposal relates. If, exceptionally, you consider that an attempt to attach positive consideration is appropriate the case should be referred to an Assistant Director.