CGT - Unascertainable Consideration

CGT - Unascertainable Consideration

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A sole trade IFA client disposed of his client base on 31.12.11.  The proceeds are unascertainable at that date as the consideration was agreed at 70% of the income earned from his client base paid monthly for 48 months.  He received £1600 from January to March 2012.  My question is how and where do I account for the disposal on his 2012 Tax Return?  The amount received in the year is below the annual exemption so no CGT pages are enacted when I enter the figures into my tax program (Digita) but surely I must notify HMRC of the disposal somehow?

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By eastangliantaxadvisor
06th Jan 2013 09:38

As your client has sold the business, the proceeds that you need to use is your best estimate of the total receivable under the contract. i.e 70% of the commission earned over the 48 month, not the actual amounts that he got, for this year.

In each tax year, your client will therefore be subject to CGT on the gain made, when that element of the proceeds is received. Note that ER would not apply.

If there is a loss, then this may be carried back to the original disposal.

 

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By gbuckell
07th Jan 2013 11:33

Earn out right

To add to Arthur's comments, the figure to include in 2011/12 is the value of the right to receive future sums at 31/12/11. This would be the client's best estimate of how much he is likely to receive discounted for time and risk. Then technically there is a part disposal of this right each month when you set part of the original value against the sum actually received. To calculate what fraction to use is based on the A/A+B part disposal formula where B is the value of the right to receive the remaining sums. Messy or what?

In practice I see no problem in doing this calculation each tax year. In other words you pool all the actual proceeds in each tax year and only value the future right once each year.

He is eligible for ER on the original disposal but not on the later ones. However, on the figures given, it looks highly unlikely that he will get gains on the later disposals that exceed his annual exemption.

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By User deleted
07th Jan 2013 11:40

Annual exemption

The trick, then, is to value (and be able to support that valuation of) the right - with appropriate discount - at less than the total sums expected to be received such that one gets the benefit of several annual exemptions, which would not have been available had the consideraton been ascertainable.

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By mhtax
07th Jan 2013 12:42

I disagree with the calculation

If this is a Capital Gais event, in these circumstances the gain to be declared in the year is the total ascertainable consideration less the full cost.

i.e. monies actually received plus best estimate of future streams less the cost of the business. If the client base was purchased then you have a cost. If it was built up over time there is no cost anyway.

You then are left with a stream of no cost assets in the right to a future consideration which becomes liable each year to the extent that it is physically received. It is pure gain at that point.

I do wonder however if he created a CGT event or whether the stream of payments could be challenged as a right to a share of income as opposed to payment by instalments

 

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By User deleted
07th Jan 2013 13:24

I disagree with the disagreement

There is no ascertainable consideration in this case, because none of the events that quantify the consideration will have happened by the date of Completion (CG14886/7). Seller may be able to best guess the future income streams, but that does not make the consideration ascertainable.

So consideration in this case is, as has been said above, the value of that right to future income streams. And that value becomes the base cost when computing future part disposals (CG14970) - the future income streams are not pure gains.

Whether or not there is the possibility of income as opposed to capital treatment will depend on the terms of the sale agreement - if it says that the business is being sold for a capital sum, albeit payable over a period of time and quantifiable by reference to future events, then that should be the end of the matter.

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By PNBFH
07th Jan 2013 14:40

Is there a prescribed method to calculating the value of the right and the appropriate discount?  Based simply on the figures received so far he is likely to received say £26k in total over 48 months? 

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By User deleted
07th Jan 2013 14:58

Usually better to over-estimate the value

Because, as noted above, Enterpreneur's Relief may be available on the initial disposal. If value of the right is under-estimated future gains in excess of the annual exemption will not qualify for ER. But an over-estimate may result in losses which again as noted above may be carried back against the original gain. So, as again mentioned above, maximising ER while trying not to waste the annual exemption may be a delicate balancing act.

There is no prescribed valuation method. As proceeds are received, 'B' in each part-disposal calculation will need to be revisited.

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