I was recently asked about the payment of capital gains tax (CGT) by instalments following a management buyout of a private company involving deferred consideration payable by monthly instalments. I have to say that whenever I have considered this question, I have ‘drawn a blank’ for one reason or another!
The legislation (at TCGA 1992, s 280) provides that where the consideration, or part of the consideration, for a CGT disposal is payable by instalments over a period of more than 18 months, the seller may opt to pay the CGT by such instalments ‘as the Board may allow’ over a period of up to eight years. The rationale behind the legislation is unobjectionable, i.e., to provide some respite where the CGT will become payable before the seller has received sufficient cash consideration to pay the tax.
What the Board May Allow
The Board’s position is set out in HMRC’s Capital Gains Manual at CG14910. Instalments of CGT, equivalent to 50% of each instalment of consideration received, are expected until the tax is paid. An example is provided, of which the following is a slightly truncated version.
Example: Payment In Instalments
Mr X sells an asset on 1 June 2023 for £120,000, payable in annual instalments of £20,000 over six years starting on 1 September 2023. The CGT payable is £35,000, due, normally, on 31 January 2025. By that date, instalments of £40,000 will have been received.
If Mr X applies to pay by instalments, tax of £20,000 (50%) will be payable on that date. On 1 September 2025, Mr X will receive £20,000, so he will pay another £10,000 tax, leaving a balance of £5,000 payable on 1 September 2026.
The CGT relating to instalments received prior to the normal due date is payable on that date, the remaining instalments being payable on the dates on which the later instalments of consideration are received.
The first instalment received was three months after the date of disposal, so the entire consideration is received in instalments. If there is an ‘up-front’ payment of consideration (which there normally is), TCGA 1992, s 280 only relates to the part of the consideration which is payable by instalments. Very often, the initial payment and instalments received by the due date for payment of the CGT will exceed 50% of the total tax, so TCGA 1992, s 280 will not apply.
Consideration in the Form of an Asset
The guidance makes the point that TCGA 1992, s 280 does not apply where the deferred consideration takes the form of an asset. The example is given of a sale with deferred consideration consisting of debentures which, having been received, cannot be given TCGA 1992, s 280 treatment.
That would also be the case where the deferred consideration consists of an earn-out, the amount of which is ‘unascertainable’. Following the decision in Marren v Ingles HL 1980, 54 TC 76 (and related appeals), the right to receive the deferred consideration (a ‘chose in action’) is itself an asset for CGT purposes.
There may be a (cockeyed) logic to the Board’s policy, but it seems to defeat the purpose of TCGA 1992, s 280; the taxpayer may have received the asset but still may not have got the cash to pay the tax when due. And since the consideration on a company sale will often include an earn-out or loan notes, this further cuts down the circumstances where TCGA 1992, s 280 could apply.
Practical Tip
An application to pay CGT instalments should be made in writing following the filing of the relevant self-assessment tax return reporting the gain. It does not affect the computation of the gain. There is no longer any requirement to demonstrate hardship in paying the CGT.