CG58055 - Deferred consideration: shares and securities: example
TCGA92/S138A
This example illustrates the effect of an earn-out right being treated as a security by TCGA92/S138A if a customer sells shares and the consideration received is an immediate payment of cash and the right to receive an unascertainable deferred amount of shares.
NOTE From 6 April 2008 only companies and other concerns within the charge to Corporation Tax may be able to claim indexation allowance, see CG17207.
FACTS
In year 0 V Ltd acquires all the shares in T Ltd for 拢100,000.
In year 10 V Ltd sells the shares in T Ltd at arm鈥檚 length to P Ltd.
The consideration is
- cash 拢500,000, and
- the right to two payments of deferred consideration, the amount depending on future profits of T Ltd, to be satisfied only by an issue of shares in P Ltd.
The market value of the right to deferred consideration at the time of disposal is agreed by Shares and Assets Valuation at 拢300,000.
In year 11 shares in P Ltd to the value of 拢202,940 (73,000 shares at 拢2.78 each) are issued to V Ltd in part satisfaction of the right to deferred consideration. The market value of the remainder of the right in year 11 is agreed by Shares and Assets Valuation at 拢90,000.
In year 12 shares in P Ltd to the value of 拢118,440 (47,000 shares at 拢2.52 each) are issued in full satisfaction of the remainder of the right to deferred consideration.
P Ltd is a company whose shares are quoted on the Stock Exchange. All of the conditions are satisfied and the earn-out right is treated as a security by section 138A.
COMPUTATIONS
A. IMMEDIATE CHARGEABLE GAIN
| Description | Action | Calculation | Amount |
|---|---|---|---|
| Cash received | - | - | 拢500,000 |
| Less apportioned cost | - | - | - |
| Cost | x | Cash | - |
| - | - | -鈥斺赌斺赌斺赌斺赌�- | - |
| - | - | Cash + right | - |
| 拢100,000 | x | 拢500,000 | - |
| - | - | -鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌�- | 拢62,500 |
| - | - | 拢500,000 + 拢300,000 | - |
| Unindexed gain | - | - | 拢437,500 |
| Less indexation 拢62,500 x 0.250 | - | - | 拢15,625 |
| - | - | - | -鈥斺赌斺赌�- |
| CHARGEABLE GAIN YEAR 10 | - | - | 拢421,875 |
| - | - | - | -鈥斺赌斺赌�- |
B. COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED CONSIDERATION
| Description | Action | Calculation | Amount |
|---|---|---|---|
| Apportioned cost | - | - | - |
| 拢100,000 | x | 拢300,000 | - |
| - | - | -鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌�- | 拢37,500 |
| - | - | 拢500,000 + 拢300,000 | - |
| Indexed rise to year 10 | - | - | - |
| 拢37,500 x 0.250 | - | - | 拢9,375 |
| - | - | - | -鈥斺赌斺赌� |
| Indexed pool of expenditure | - | - | 拢46,875 |
| - | - | - | -鈥斺赌斺赌� |
C. COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED
| Calculation | Notional security | Cost of | Indexed pool of |
|---|---|---|---|
| - | - | right | expenditure |
| - | As at year 10 | 拢37,500 | 拢46,875 |
| - | Indexed rise to year 11 | - | - |
| - | 拢46,875 x 0.025 | - | 1,172 |
| - | - | - | -鈥斺赌斺赌� |
| - | - | - | 48,047 |
| - | Attributable to 73,000 shares in | - | - |
| - | P Ltd issued in year 11 | - | - |
| 202,940 | - | - | - |
| 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌� | - | 25,979 | 33,286 |
| 202,940 + 90,000 | - | -鈥斺赌斺赌� | -鈥斺赌斺赌� |
| - | Remainder at year 11 | 11,521 | 拢14,761 |
| - | Indexed rise to year 12 | - | - |
| - | 14,761 x 0.025 | - | 拢369 |
| - | - | - | -鈥斺赌斺赌�- |
| - | - | - | 拢15,130 |
| - | Attributable to 47,000 shares | - | - |
| - | in P Ltd issued year 12 | 拢11,521 | 拢15,130 |
D. SHARES IN P LTD
| P Ltd Shareholding | No of shares | Qualifying | Indexed pool |
|---|---|---|---|
| - | - | expenditure | of expenditure |
| 73,000 shares acquired | - | - | - |
| year 11 | - | - | - |
| (see computations at C) | 73,000 | 拢25,979 | 拢33,286 |
| - | -鈥斺赌斺赌斺€� | -鈥斺赌斺赌�- | -鈥斺赌斺赌�- |
| Pool at year 11 | 73,000 | 拢25,979 | 拢33,286 |
| Indexed rise to year 12 | - | - | - |
| 拢33,286 x 0.025 | - | - | 拢833 |
| - | - | - | -鈥斺赌斺赌�- |
| - | - | - | 拢34,119 |
| Additional 47,000 shares | - | - | - |
| acquired year 12 | - | - | - |
| (see computations at C) | 47,000 | 拢11,521 | 拢15,130 |
| - | -鈥斺赌斺赌� | -鈥斺赌斺赌�- | -鈥斺赌斺赌�- |
| Pool at October 1993 | 120,000 | 拢37,500 | 拢49,249 |
| - | -鈥斺赌斺赌�- | -鈥斺赌斺赌斺€� | -鈥斺赌斺赌�- |
EXPLANATION
The statutory reasons for the method of computation are
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 (section 128(4) and TCGA92/S129).
B. COST OF THE NOTIONAL SECURITY UNDER section 138A
The notional security forms the 鈥榥ew holding鈥� under TCGA92/S127 as applied by TCGA92/S135(3).
C. RIGHT TO UNASCERTAINABLE DEFERRED CONSIDERATION
The part-satisfaction of the right to deferred consideration is a part-disposal of the right. But because of section 138A it is treated as a conversion of securities within TCGA92/S132. Section 127 applies with the necessary adaptations to the part-disposal and part of the base cost of the 鈥榥otional security鈥� is transferred to the holding of shares in P Ltd.
The procedure for obtaining valuations of the right to unascertainable deferred consideration is described at CG14950.
D. SHARES IN P LTD
The shares in P Ltd which are acquired go into the TCGA92/S104 holding of shares at the base cost computed in accordance with C above.