CG72850 - Land: disposals: unascertainable deferred consideration

This guidance considers the treatment of unascertainable deferred consideration and, where appropriate, how it interacts with the transactions in land rules.

It is set out as follows:-

  1. Introduction
  2. Transactions in land (5 July 2016 onwards)
  3. Transactions in land (on or before 4 July 2016)
  4. Computation of chargeable gain where there is unascertainable deferred consideration
  5. Valuation

  6. Receipt of future amounts

  7. Introduction

The consideration will be unascertainable if the events which establish its amount do not occur until after the date of the disposal.

An example of an unascertainable payment would be where an agreement for the sale of land provides for consideration of a capital sum payable in three annual instalments to be calculated by reference to the tonnage of land fill dumped on that site in the three years following the date of the contract.

The presence of a maximum amount to be paid does not imply that the consideration is ascertainable in that maximum figure.

An example of such a case would be where the agreement for the sale of land provides for an immediate payment for £250,000 plus a further payment of half the profit made by the purchaser on a subsequent sale of the land subject to a maximum further payment of £100,000.

  1. Transactions in land (5 July 2016 onwards)

ITA2007/S517A-517U (Part 9A)
CTA2010/S356OA-356OO (Part 8ZB)

Where an agreement for the sale of land provides for additional consideration to be received on the happening of some future event, the possibility of liability under the sections (transactions in land rules) above should be considered.

Prior to 5 July 2016, different transactions in land rules applied, see Section 3 below.

Certain transactions that took place within the period between the 2016 Budget on 16 March 2016 and the legislation being enacted on 5 July 2016 are within the scope of the new rules.

The detailed rules on transactions in land can be found at BIM60510.

Generally, where the transactions in land rules apply, any ‘gains’ are chargeable to profits as trading income.

There is an exemption for any gains which are attributable to the period before the intention to develop is formed (ITA2007/S517L or CTA2010/S356OL) whilst the land functioned as a capital asset; see BIM60650.

In such cases, you must establish the ‘first intention date’.

The ‘first intention date’ is the date at which it was first intended that the land would be developed or sold for the purpose of subsequent development. The date is a matter of fact which should be established and, if possible, agreed with the customer.

The value of the land at the ‘first intention date’ should be established by reference to the Valuation Office Agency (for land in England, Wales or Scotland) or the Land & Property Services Northern Ireland (for land in Northern Ireland). The process for obtaining valuations and guidance on what to do if the customer does not accept a valuation is set out at CG74000C onwards.

Where the amount of consideration paid on the initial sale is less than the market value determined for the ‘first intention date’, the consideration that should be brought into account for the disposal should be the market value as determined on the ‘first intention date’. In these cases, there is no need to determine the value of the right to deferred consideration as set out in Section 4 below.

Example

Mr S sells a piece of land to a developer in September 2020. He had previously farmed the land and the original cost of the land was £100,000.

He receives £1 million on completion of the contract and the right to a further sum dependent on the profits made when the developer sells the land after redevelopment (this amount is unascertainable deferred consideration).

Following redevelopment, Mr S receives a further £1.5m in April 2024. It is accepted that the transaction in land provisions apply and that the ‘first intention date’ was the date of contract in September 2020.

The Valuation Office Agency states that the value of the land in September 2020 was £1.4 million. This figure is accepted by Mr S as being the value of the land when the intention to develop if was first formed.

The amount chargeable to capital gains tax on the disposal in September 2020 is:-

= Consideration (market value at September 2020) - Original cost

= £1.4 million - £100,000

= £1.3 million

The total amount of consideration received (£2.5 million) less the amount of consideration exempted as taken into account for the purposes of chargeable gains (£1.4 million) or £1.1 million will be treated as trading income within the transactions in land rules. Note, this amount is excluded from the computation of chargeable gains by virtue of TCGA1992/S37(1).

  1. Transactions in land (on or before 4 July 2016)

ITA2007/S752-772 (Part 13)
CTA2010/S815-833 (Part 18)

For any disposal prior to 5 July 2016, the former transactions in land rules (old rules) applied.

The detailed old rules on transactions in land that applied to disposals before that date can be found at BIM60300.

As with the current rules, the most common situations which will be encountered are where the receipt of additional consideration is dependent on:-

  • The purchaser obtaining planning permission in respect of the land (if this is the only condition, liability under the sections above is unlikely), or
  • The purchaser developing the land by constructing housing, offices, shops or industrial premises (liability under the sections above is a distinct possibility).

However, you should note that the old rules differ in a number of ways from the current rules and you should seek advice where appropriate. Note in particular that where you are considering a payment of deferred consideration received after 4 July 2016 but the original disposal was prior to that date, the old rules will apply (although disposals made on or after 16 March 2016 may be within the current rules).

The old rules, where they applied, also brought appropriate gains into charge as trading income so they were likewise exempt from chargeable gains.

As with the current rules, there was an exemption (ITA2007/765 or CTA2010/S827) from the transactions in land rules for gains attributable to the period before the intention to develop was developed. In such cases, the ‘first intention date’ and valuation at that date should be established as above in Section 2 and the amounts chargeable to chargeable gains and transactions in land computed (as per the above example in that Section).

  1. Computation of chargeable gains where there is unascertainable deferred consideration

The value of the right to receive the future amounts is to be included in the consideration for the disposal the land.

This principle was established in two tax cases, Marson v Marriage 54TC59 and Marren v Ingles 54TC76.

Both of the cases concerned agreements for the sale of assets in which the vendor received a quantified amount of money plus a conditional and unquantifiable further amount payable at an uncertain future date. The point in dispute in both cases was whether any chargeable gain arose when the further amounts were received.

In Marson v Marriage, Justice Fox decided that TCGA92/S48 applies when the sum to be brought into account represents ascertainable consideration even when the right to it is contingent. It does not apply when the amount is unascertainable. In Marren v Ingles, a number of principles were established:-

  • the right to receive future unascertainable receipts is a ‘chose in action’. This is an incorporeal asset which is a chargeable asset for Capital Gains Tax purposes;
  • when the future amounts are ascertained and received they are capital sums derived from assets within TCGA92/S22; and
  • the future sums received are not payments in satisfaction of a debt within the terms of TCGA92/S251.

Further guidance on unascertainable deferred consideration can be found at CG14940 onwards.

In the case involving unascertainable deferred consideration, the amount brought into account as consideration for the disposal will be:-

  • Any amount of consideration (in money or money’s worth) given at the time of the disposal; plus
  • The value of any right to deferred consideration that was granted as part of the disposal.

Section 5 below considers how such rights should be valued.

  1. Valuation

In order to establish the value of the right to receive unascertainable consideration at some time in the future, you should follow the following procedure.

  • If possible, obtain the customer’s agreement as to what is to be valued, and any valuation of the right which the customer wishes to put forward;
  • Where the original asset disposed of was land in England, Scotland, Wales or Northern Ireland, and the transactions in land provisions (see above) do not apply, a request for a valuation of the right should be forwarded to the Valuation Office Agency or the Land & Property Services Northern Ireland as set out at CG74000C onwards (particularly CG74050 and CG74300);
  • Where the original asset is not located in one of the above areas, you should follow the guidance at CG75800.

  1. Receipt of future amounts

When the future amounts become ascertainable and are received, there will be an occasion of charge for the purposes of Capital Gains Tax or Corporation Tax on Chargeable Gains.

On each occasion that one of these further amounts is received, there will be a disposal or part disposal of the right to receive the future payments.

The acquisition cost of that right is the value of the right which has been brought into the computation of the gain or loss arising on the original disposal of land.

For further information on how to deal with such further receipts, see CG14970.

Where losses accrue on disposals of certain rights on or after 10 April 2003 individuals and others within the charge to Capital Gains Tax (but not companies within the charge to corporation tax) may elect to set off the loss in earlier years, see CG15080 onwards.