CG14800 - Contingent liabilities: what is a contingent liability?

When a person sells an asset they may accept a liability to make payments to the purchaser if certain events happen or if an asset is not as described in the contract. A common example is the warranties that are often found in share sale agreements. The vendors of the shares may agree to reimburse the purchaser if the company has undisclosed tax liabilities or the stock is over valued. The legal liability exists from the date of the agreement. But payment is contingent on the purchaser establishing the seller was in breach of the warranty or commitment.

The effect of making a disposal subject to a contingent liability was considered in Randall v Plumb (50TC392). It was held the value of the consideration brought into the Capital Gains Tax computation should take account of the contingency. That is, the disposal proceeds should be reduced by the value of the possibility that a payment may be due under the contingent liability.