Chapter 15 Deferred Consideration Flashcards
Deferred consideration - when does a disposal take place and CGT instalments
When does a disposal take place – the date of disposal for CGT is the date when the contract to sell the asset is signed. If a contract is conditional on an event taking place, the date of disposal for CGT purposes is the date that all of the relevant conditions have been fulfilled. It is important to work out the disposal date as this determines which year tax is payable.
CGT Instalments – you may be able to pay CGT in instalments under s280 if the sale proceeds are receivable in instalments over a period in excess of 18 months which ends after the normal due date for payment of CGT. This is not automatic and the individual needs to make an application in writing, if no application is made, CGT is payable on 31 January following the tax year of the disposal.
The taxpayer is expected to pay instalments of CGT equal to 50% of each instalment of the consideration (sale proceeds) receivable under the contract until the CGT liability is resolved. The period over which the vendor can pay CGT is the shorter of two periods being the period over which consideration is receivable or 8 years. The final instalment can never be due any later than the due date for the final instalment of consideration. If a taxpayer pays in instalments, the instalments are interest free.
Deferred consideration – ascertainable consideration – the consideration paid to a vendor may include an earn-out element. This is a term which describes further or additional proceeds, payable to the vendor on the satisfaction of some future event. The additional features are referred to as deferred consideration. If the additional consideration is fixed, the whole transaction is treated as one disposal for CGT purposes. Therefore, all proceeds plus the future consideration is brought into the capital gains tax computation in the year that contracts are signed.
