CGT17 Earn Outs & Deferred Consideration Flashcards
A disposal takes place for CGT when ….
If a contract is conditional …
a contract is signed.
the disposal takes place on the date the conditions are fulfilled.
CGT can be paid by instalments if …..
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.
The taxpayer will be expected to pay instalments of CGT equal to….
50% of each instalment of consideration due
The CGT is due on the date the payment of each instalment is due, unless …….
this is before the normal due date in which case the CGT is payable on the normal due date.
The CGT instalment period can …..
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.
If the consideration includes further proceeds payable upon some future event this is called ……
an ‘earn-out’.
If the earn-out is ascertainable ….
the additional proceeds are simply included with the proceeds for the main gain.
If the earn-out is unascertainable….
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
Where the earn-out is satisfied in shares or loan stock…
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