SVM107160 - Capital Gains Procedures: the Valuation of the Right to Receive Deferred Consideration (Marren v Ingles Cases or ‘Earn-Outs’)
These valuations arise when an asset is sold and payment of all or part of the purchase price is deferred and unascertainable. Usually the deferred unascertainable consideration is payable in tranches and is calculated by reference to profits (typically) up to 3 years following the original sale agreement. In such cases payment of each tranche constitutes a part disposal of the right to deferred consideration and the normal part disposal rules apply. For part disposal rules, please see CG12730P.
SAV is asked to agree not only the value of the deferred consideration on the original sale (initial right) but also the value of the remaining rights to deferred consideration immediately after the payment of each tranche (residual right).
Where a series of payments is received this will form a series of part-disposals. The instructing office will therefore need to know the value of the remaining right at each date of payment to calculate the CG payable. Further guidance can be found in the CG Manual at CG14850 - 15130 and CG58000 - 58206.
When risk assessing this type of case you should bear in mind that Business Asset Disposal Relief (BADR) is only available on any initial right, taxed with the initial proceeds. Subsequent disposals are not disposals of a business asset and are not eligible for BADR.
Further, if the receipt of deferred unascertainable consideration results in a later gain (i.e. the amount received exceeds the original valuation of the right to receive it), this gain will not qualify for any reliefs, even if the relief was available on the original disposal. This is because the gain is from the disposal of the right to receive deferred unascertainable consideration and not the disposal of the original asset.
Additional Guidance: SVM510000