Tax treatment of clawback clause payment

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  • Telometer
    replied
    Marren v Ingles, my apologies. I guess the answer is you did, and assumed it to be nil.

    http://www.hmrc.gov.uk/MANUALS/cgmanual/cg12070.htm

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  • quarterday
    replied
    Can you quote the full citation for Marrven vs Ingles? Can't find the case anywhere..

    I suppose the reason we did not attribute any value to the possible overage on the land is that possibility of development is at present incredibly remote. It is not merely green belt, its actually just inside a National Park; although the rest of our site which was developed, sustainably of course, was just outside!
    Originally posted by Telometer View Post
    Why did you consider it inappropriate to apply a Marrven v Ingles approach and allocate any value to this contingent and unascertainable consideration? I accept the possibility is highly unlikely, but that immediately accepts that there is such a possibility and therefore surely attributes value?

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  • Telometer
    replied
    Originally posted by quarterday View Post
    "As an aside, a company I act for sold a field a few years ago at an amenity valuation where it is highly unlikely that development will ever be permitted but the vendors got the purchasers to agree to a restriction on the title whereby on any sale or transfer of all or any part of the land by the buyers or their successors in title 3% of the consideration ad valorem is to be paid to the transferees for the next 200 years. Somewhat experimental! We will worry about the tax treatment of any such payments if and when any overage is ever received!
    Why did you consider it inappropriate to apply a Marrven v Ingles approach and allocate any value to this contingent and unascertainable consideration? I accept the possibility is highly unlikely, but that immediately accepts that there is such a possibility and therefore surely attributes value?

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  • islandgirl
    replied
    Quarterday and King-Maker: thank you for your sensible and interesting contributions.

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  • quarterday
    replied
    "Clawback" and "overage"; difficult fields and especially the appropriate fiscal approach where it is uncertain whether an uplift or additional payment will ever be receivable. Presumably there could be circumstances where the transaction is structured such that receipt of moneys is taxable as a disposal chargeable as capital gain.

    As an aside, a company I act for sold a field a few years ago at an amenity valuation where it is highly unlikely that development will ever be permitted but the vendors got the purchasers to agree to a restriction on the title whereby on any sale or transfer of all or any part of the land by the buyers or their successors in title 3% of the consideration ad valorem is to be paid to the transferees for the next 200 years. Somewhat experimental! We will worry about the tax treatment of any such payments if and when any overage is ever received!

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  • King_Maker
    replied
    I have come late to this "heated debate".

    As has already been stated, I think legal advice needs to be taken on the exact (and changing?) nature of the transaction.

    Assuming (dangerous) that it is a sale and not an option deal, the deferred consideration of £300,000 (or whatever the correct amount is) is ascertainable (i.e. can be quantified).

    This means that section 48 TCGA 1992 is in point. This brings the £300,000 into the CGT disposal along with £15,000 :

    "Consideration due after time of disposal

    In the computation of the gain consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent; and if any part of the consideration so brought into account is subsequently shown to the satisfaction of the inspector to be irrecoverable, such adjustment, whether by way of discharge or repayment of tax or otherwise, shall be made as is required in consequence. "

    islandgirl, this does not appear to be a "clawback" deal, as there is no share in the any future development being contemplated - merely a fixed £300,000 on the grant of Planning Permission.

    If it were an "overage" deal (i.e extra consideration for profit per unit etc), then vendors need to be wary of the anti-avoidance legislation (formerly) Section 776 ICTA 1988 - now ITA 2007 Part 13 Chapter 3 .

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  • Telometer
    replied
    Originally posted by islandgirl
    Oh and in case you are curious we were talking at cross purposes as I suspected. Jackboy had it right in #18.
    Have you read my post #20 which addresses that particular point? The consequences of unascertainable contingent consideration are, similarly, not taxation on receipt, but instead taxation at time time of sale on proceeds you have not receive - and indeed may never receive.

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  • Phlash
    replied
    Originally posted by islandgirl
    dangerous for whom?

    For you....

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  • Telometer
    replied
    I'm told Ford is quite a sociable place, Phlash.

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  • Phlash
    replied
    Originally posted by islandgirl View Post
    In other words, if you sold the Kirkcambeck property there would be an amount of money you would be prepared to receive in 2010 in lieu of your right to receive cash in 2020. This would reflect the probability of the deal going through. So you might value it at (he guesses) 50% of the uplift you expect.

    And if planning is never granted you have paid tax on nothing?
    I still think that we are at cross purposes. Leave it to the experts. Believe me everything I do is 100% correct.
    I am afraid on this one sir we will have to agree to disagree.
    That could be a dangerous conclusion...

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  • islandgirl
    replied
    In other words, if you sold the Kirkcambeck property there would be an amount of money you would be prepared to receive in 2010 in lieu of your right to receive cash in 2020. This would reflect the probability of the deal going through. So you might value it at (he guesses) 50% of the uplift you expect.

    And if planning is never granted you have paid tax on nothing?
    I still think that we are at cross purposes. Leave it to the experts. Believe me everything I do is 100% correct.
    I am afraid on this one sir we will have to agree to disagree.

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  • Telometer
    replied
    Jackboy - spot on. Contingent consideration isn't that much more helpful though as it still results in a tax bill without having received proceeds. Because you have to value the "right to receive future cash" at the disposal date. So in Islandgirl's case, the right is to receive 50%. This is contingent and unascertainable. So you have to value this.

    Originally posted by islandgirl View Post
    He would have no idea how much barns with permission would be worth in 2020. I believe the tax would be paid in 2020 on a capital gain of £200,000. Am I wrong in your opinion?
    You are wrong - in the opinion of HMRC as well. We are talking about the same situation, your belief is just wrong.

    In other words, if you sold the Kirkcambeck property there would be an amount of money you would be prepared to receive in 2010 in lieu of your right to receive cash in 2020. This would reflect the probability of the deal going through. So you might value it at (he guesses) 50% of the uplift you expect.

    If you still don't believe me, Islandgirl, read this http://www.hmrc.gov.uk/manuals/CGmanual/cg15089.htm which covers (under exception 1) the point that the value has to be taken into account at the point of disposal as in OP's situation. And read this regarding the situation you describe with unascertainable contingent consideration http://www.hmrc.gov.uk/manuals/CGmanual/CG14950.htm


    I am aware of a situation where the amount of contingent consideration which was taxed in 2007 (at the peak of the market) was of the order of tens of millions. Tax was payable in (or just after) 2007. When the gain crystallises in the next couple of years, no consideration at all will be received and a capital loss will arise.
    Last edited by LandlordZONE; 24-03-2011, 10:08 AM.

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  • islandgirl
    replied
    perhaps that is it?
    I always thought that Teleometer and I were talking at cross purposes
    thanks Jackboy

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  • jackboy
    replied
    I'm no tax expert but i think the point may be that in the case above the future profits were unknown. In my friends case the contract specified £300,000 so the deferred consideration was ascertainable but contingent.

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  • islandgirl
    replied
    Just so I understand your position, Telometer perhaps you could let me know the following -
    In this case:

    In the village of Kirkcambeck, just south of the Border in Cumbria, five Grade II-listed stone barns in the grounds of a Victorian country house were sold with the proviso that the previous owners would get 50% of any rise in profit achieved by gaining more lucrative planning permission for converting them to homes.

    Say the 5 barns sold in 2010 for £100,000 as barns. Then 10 years later in 2020 (ignore inflation) the purchaser gets permission to convert them to houses. They are now worth £500,000. The original vendor is due £200,000. Are you saying the original vendor would have paid tax on the "extra" £200,000 in 2010 (ie that he would have paid tax on £300,000). How could he? The taxman had no idea if planning permission would be gained. He would have no idea how much barns with permission would be worth in 2020. I believe the tax would be paid in 2020 on a capital gain of £200,000. Am I wrong in your opinion?

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