CGT17 Earn Outs & Deferred Consideration

Question 1

A disposal takes place for CGT when ….

If a contract is conditional …

Answer 1

a contract is signed.

the disposal takes place on the date the conditions are fulfilled.

Question 2

CGT can be paid by instalments if …..

Answer 2

an application is made. This is possible where the
proceeds are receivable over a period exceeding 18 months which ends after the normal due date for payment of CGT. These instalments are interest free.

Question 3

The taxpayer will be expected to pay instalments of CGT equal to….

Answer 3

50% of each instalment of consideration due

Question 4

The CGT is due on the date the payment of each instalment is due, unless …….

Answer 4

this is before the normal due date in which case the CGT is payable on the normal due date.

Question 5

The CGT instalment period can …..

Answer 5

NOT be longer than eight years from the normal CGT due
date. Therefore, the last CGT payment by instalments under TCGA 1992, s.280 should be made by the earlier of:
* the last sale proceeds instalment received; and
* eight years from the normal CGT due date.

Question 6

If the consideration includes further proceeds payable upon some future event this is called ……

Answer 6

an ‘earn-out’.

Question 7

If the earn-out is ascertainable ….

Answer 7

the additional proceeds are simply included with the proceeds for the main gain.

Question 8

If the earn-out is unascertainable….

Answer 8

we use the Marren v Ingles principle. The value of the
right to receive further consideration must be established and this amount is included with the proceeds for the main gain.

If the earn-out right is disposed of and gives rise to a capital loss, this loss can be carried back to the year in which the original disposal occurred. A CGT repayment is likely to be
generated

Question 9

Where the earn-out is satisfied in shares or loan stock…

Answer 9

TCGA 1992, s.138A automatically treats the earn-out as a security. The share-for-share exchange rules will therefore apply and no gain will arise on receipt of the earn-out.

An election can be made to disapply this treatment, which may be advantageous if business asset disposal relief or investors’ relief is available on the original gain