Deferred consideration

Deferred consideration

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Compnay sells land to developer for 30 houses. Deal is £600k now and 20% of each completed house sale (when house sold) - subject to a minimum of £150k per house. Ignoring the possible application of anti-avoidance on transactions in land, what is the ascertainable amount in this case?

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By Steve Kesby
22nd May 2014 10:16

I would say...

... that you have:

ascertained consideration of £600K;contingent ascertained consideration of 30 x £150K (assuming the £150K is the minimum payable to the company for each sale, rather than the amount on which the 20% is calculated); andunascertained consideration of £X, being the amount, if any, that proves to be payable over and above the £150K per house.

When you say ignore the transactions in land legislation though. Really?

I assume you're familiar with BIM60350 onwards?

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By Ruddles
22nd May 2014 10:47

Thanks as always, Steve

Pretty much as I thought.

But I wasn't saying that we were ignoring the anti-avoidance - I was just trying to get my head round the principle of ascertainable/unascertainable. I could (and perhaps should) have used an example not involving land :)

But since you've raised the issue, can you explain how it actually works. We have yet to see all the details, but have been told that value of land at the time of intention to develop/sell was £5m (hence, I think, the minimum £150k per house on top of the £600k).

So, let's say 30 houses all sold for £800k each. Does it work like this:

Amount to be excluded from income charge £5m.

So, amount chargeable to income is £600k plus £4.5m plus unascertainable right less £5m - or, chargeable to capital is £5m. Amount chargeable to income will therefore simply be £400k (being the immediate £100k excess of ascertainable amount over £5m capital element plus the £300k on the additional share of house sale proceeds)? In other words, the right to unascertainable consideration doesn't actually come into the calculation of the immediate chargeable gain in this case?

What would happen if there were no minimum? So that the ascertainable amount is only the £600k and the value of the unascertainable right is say £4m. I'm really struggling to understand the interaction of unascertainable consideration with the anti-avoidance provisions.

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By Steve Kesby
22nd May 2014 11:14

My understanding is this

I've never encountered it in practice, but I'd understood that you first had to calculate your capital gains (there will be a series of them) ignoring indexation. 

The proceeds for the first gain would be the amount actually received, plus the contingent consideration (on the assumption that it will be received - you can obtain relief later if it isn't), plus the value of the right to receive the unascertained consideration.

The proceeds of the others would be the amounts of the unascertained consideration as and when they're received and the cost would be an (A/A+B) proportion of the value brought into the first gain calculation.

Those amounts start being charged as trading income once they start to exceed the gain that would have arisen had the land been sold as a capital asset immediately before the intention to develop was formed.

Then you can go back and recalculate your chargeable gains to exclude from the sale proceeds the amount charged as trading income and bring in your indexation.

The only effect for a corporate then is the loss of indexation for the development gain, which seems fair enough.

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By User deleted
22nd May 2014 12:02

Is that right, Steve? (On the indexation point)

Will the company not be entitled to full indexation in any event (subject to it being restricted to the chargeable gain) since it is based on the original cost of the land? Or are you saying that the base cost needs to be apportioned somehow?

For example, land cost £200k sold to developer for £1m,. End of story as far as seller is concerned so indexation on £200k.

Alternatively, land sold for £750k (let's say value is £750k) plus a slice of the action. Anything further will be chargeable as income. But will the company still not get indexation on the £200k?

(Or are you referring to the additional indexation that would otherwise be available on the part-disposals of the chose in action?)

I can think of other implications for a corporate - impact on rollover relief, inability to use capital losses.

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By Steve Kesby
22nd May 2014 12:26

I think you're right BKD

Yes. The indexation is on cost, which is there in any event in the CGT part of the calculation. I suppose the indexation just skews it a little.

I'd accept the other points you make as well.

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