If the consideration includes further proceeds payable upon some future event this is called an earn-out. When further consideration is received, this is a further disposal, being the disposal of the right to receive deferred consideration. This document discusses principles of ascertainable deferred consideration, unascertainable consideration, the Marren V Ingles principle and loss on disposal of right to receive future consideration.
The consideration for disposal for a business will often be simply in the form of cash. However, in many cases there may also be some form of deferred consideration, which may or may not tie key individuals into continuing to work for the business for a certain period of time. In such cases the deferred element of the consideration may be quantified at a later date, typically using an agreed formula - based on two or three years post acquisition profits. An arrangement such as this is known as an earn-out.
The way in which consideration for business sales is structured determines when tax falls due. There are special rules allowing the payment of tax in instalments in certain circumstances, which are covered towards the end of this guidance note.
Date of disposal - reminder of basic rules
The basic rule is that the date of disposal for capital gains tax is the date when there is an unconditional contract for sale. If a contract is conditional on a condition precedent, the date of disposal for CGT purposes is the date that all of the relevant conditions have been fulfilled. A condition precedent is an external condi-tion, for example a contract for sale of land may be conditional on planning permission being granted. A condition subsequent is a condition between the parties to the proposed sale and does not trigger a disposal date for CGT purposes. TCGA 1992, s 28(1), (2)