CG58060 - 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 receives an immediate issue of shares 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
- 80,000 shares in P Ltd at market value of 拢2.25 each (total 拢180,000), 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) COST OF SHARES IN P LTD
| Apportioned cost | Multiply | Description | Amount |
|---|---|---|---|
| cost | x | shares | - |
| - | - | -鈥斺赌斺赌斺赌斺赌斺赌斺赌� | - |
| - | - | shares + 鈥榬ight鈥� | - |
| 拢100,0000 | x | 拢180,000 | - |
| - | - | -鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌�- | 拢37,500 at year 0 |
| - | - | 拢180,000 + 拢300,000 | - |
| Indexed rise to year 10 | - | - | - |
| 拢37,500 x 0.250 | - | - | 9,375 |
| - | - | - | -鈥斺赌斺赌�- |
| Indexed pool of expenditure | - | - | 拢46,875 |
| - | - | - | -鈥斺赌斺赌�- |
B) COST OF NOTIONAL SECURITY = RIGHT TO DEFERRED CONSIDERATION
| Apportioned cost | Multiply | Description | Amount |
|---|---|---|---|
| 拢100,000 | x | 拢300,000 | - |
| - | - | -鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌�- | 拢62,500 |
| - | - | 拢180,000 + 拢300,000 | - |
| Indexed rise to year 10 | - | - | - |
| 拢62,500 x 0.250 | - | - | 拢15,625 |
| - | - | - | -鈥斺赌斺赌�- |
| Indexed pool of expenditure | - | - | 拢78,125 |
| - | - | - | -鈥斺赌斺赌斺赌� |
C) COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED
| Notional security | Cost of right | Indexed pool of expenditure |
|---|---|---|
| As at year 10 | 拢62,500 | 拢78,125 |
| Indexed rise to year 11 | - | - |
| 拢78,125 x 0.025 | - | 拢1,954 |
| - | - | -鈥斺赌斺赌�- |
| - | - | 拢80,079 |
| Attributable to 73,000 shares | - | - |
| in P Ltd issued in year 11 | - | - |
| 拢202, 940 | - | - |
| -鈥斺赌斺赌斺赌斺赌斺赌斺赌�- | 拢43,298 | 拢55,476 |
| 拢202,940 + 拢90,000 | - | - |
| Remainder at year 11 | 拢19,202 | 拢24,603 |
| Indexed rise to year 12 | - | - |
| 拢24,602 x 0.025 | - | 拢615 |
| - | - | -鈥斺赌斺赌斺赌� |
| - | - | 拢25,218 |
| Attributable to 47,000 shares | - | - |
| In P Ltd issued year 12 | 拢19,202 | 拢25,218 |
D) SHARES IN P LTD
| P Ltd Shareholding | No of shares | Qualifying | Indexed pool of |
|---|---|---|---|
| - | - | expenditure | expenditure |
| As at year 10 | - | - | - |
| (see computations at A) | 80,000 | 拢37,500 | 拢46,875 |
| - | -鈥斺赌斺赌� | -鈥斺赌斺赌斺赌� | -鈥斺赌斺赌�- |
| Indexed rise to year 11 | - | - | - |
| 拢46,875 x 0.025 | - | - | 拢1,172 |
| - | - | - | -鈥斺赌斺赌�- |
| - | - | - | 拢48,047 |
| Additional 73,000 shares | - | - | - |
| acquired year 11 | - | - | - |
| (see computations at C) | 73,000 | 拢43,298 | 拢55,476 |
| - | -鈥斺赌斺赌� | -鈥斺赌斺赌斺赌� | -鈥斺赌斺赌�- |
| Pool at year 11 | 153,000 | 拢80,798 | 拢103,523 |
| - | -鈥斺赌斺赌�- | -鈥斺赌斺赌斺赌� | -鈥斺赌斺赌斺赌� |
| Indexed rise to year 12 | - | - | - |
| 拢103,523 x 0.025 | - | - | 拢2,588 |
| - | - | - | -鈥斺赌斺赌斺赌� |
| - | - | - | 拢106,111 |
| Additional 47,000 shares | - | - | - |
| acquired year 12 | - | - | - |
| (see computations at C) | 47,000 | 拢19,202 | 拢25,218 |
| - | -鈥斺赌斺赌�- | -鈥斺赌斺赌斺赌� | -鈥斺赌斺赌斺赌� |
| Pool at October 1993 | 200,000 | 拢100,000 | 拢131,329 |
| - | -鈥斺赌斺赌�- | -鈥斺赌斺赌斺赌� | -鈥斺赌斺赌斺赌� |
EXPLANATION
The statutory reasons for the method of computation are:
A. COST OF SHARES IN P LTD
V Ltd has acquired shares in P Ltd and a notional security' under section 138A. These are treated as two classes of shares or debentures. Together they form the new holding鈥� under TCGA92/S127 as applied by TCGA92/S135(3).
If the shares in P Ltd are not quoted the apportionment should be made by reference to market values at the date of a disposal of all or part of the new holding.
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. TCGA92/S127 applies with the necessary adaptations to the part disposal and part of the base cost of the notional security 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 of the same class. The base cost and indexed pool of expenditure is calculated in accordance with A and B above.