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What goes on Tax Return for Captial Gain

Sale of business by instalments - instalments not paid and in dispute.

Hi All

Hope you can help with this brain teaser.

Client sold entire shareholding in trading business (qualifies for entrepreneur relief) in 2016/17 tax year.

Total sale price payable as follows:-

First instalment June 2016 - approx 40%

Second instalment after 12 months - approx 20%

Third instalment after 18 months - approx 15%

Fourth instalment after 24 months - approx 25%

Purchaser is now disputung contact (under due diligence and not contingent on business performance) and client has only received first instalment - there is an ongoing court case regarding the settlement of the outstanding amounts and this is unlikely to be concluded for several months.

What do we put on 2016/17 Tax Return for Capital Gains?

Do we put in provisional figures based on First instalment received only and disclose this in additional information?

Do we put in full disposal and disclose that this may not be received.

Lawyers unwilling to give probability of outcome of court case.

What about costs in relation to this debt? (Client hoping to recover these but may not recover in full)

Do these get factored into Capital Gain?

Or can tax relief be obtained in another way?

Appreciate this is a busy time or everybody but looking for someone who may have experienced this before and can give me some pointers.

Any input would be greatly appreciated.

Replies

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22nd Jan 2018 14:28

Hi there. A bit busy with tax returns at the moment, but I think most of the information that you are looking for can be found at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14910 and the next three pages....

Thanks (1)
By Ruddles
to gainsborough
22nd Jan 2018 15:07

CG14933 is probably the most relevant - but it doesn't look as though that point has been reached yet.

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22nd Jan 2018 16:44

In my opinion, as the consideration is ascertainable, and to qualify fo ER on the whole of the gain, it all goes into the calculation.
If he does not then receive it all he reclaims any overpayment.
If you only declare the amount received on the grounds that the total is unascertainable, and then receive more, the extra will not qualify for ER and there will be no costs available.
I do not see any relief for the court costs unless it can be argued that they are incurred in the valuation of the shares

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23rd Jan 2018 09:30

I think Marion is a bit pessimistic. Presumably if Client wins court case he/she will recover costs. So the problem arises if Client loses Court proceedings; they could claim their own legal fees under s.38(2) and arguably costs claimed by the purchaser under s.38(1)(b)- but the
Court of Appeal case of Julian Blackwell ve HMRC may override that aspect of any claim

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to Montrose
23rd Jan 2018 10:15

The disposal has happened. Costs incurred after you have disposed of something cannot be costs of enhancing or disposing of that something. I think Marion is anything but pessimistic.

Similarly the ex-owner is not defending his right over the asset, but arguing the quantum of (and trying to obtain) the proceeds.

S38 is notoriously restrictive.

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By Ruddles
to Tax Dragon
23rd Jan 2018 11:01

An interesting aside - presumably the analysis might have been different had the consideration been unascertainable?

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to Ruddles
23rd Jan 2018 12:40

I may be wrong, but I think the difference ultimately lies in the nature of the new asset, ie the right to future proceeds. In the OP's scenario, this is an exempt debt. Whether the costs of recovering that debt are deductible seems irrelevant (and nobody talks about the right as a separate asset in this scenario. Who cares?) In your scenario, the new asset (the right) is itself a chargeable asset for CGT, so indeed you would need to do additional (not necessarily different) analysis in relation to the costs of exercising that right.

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By 2156806
25th Jan 2018 11:06

Thanks for all your comments - especially at this time of the year - can see a way forward now.

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