Commentary on Sections Structure of Chapters Overview Section 442: Securities issued in accordance with qualifying earn-out right
1785.This section provides rules for ascertaining the acquisition value of a security which forms the whole or part of the consideration on the disposal of a business. It is based on paragraph 3A of Schedule 13 to FA 1996.
1786.This section prevents a profit on deeply discounted securities being charged to capital gains tax as well as to income tax under this Chapter. Where a right to securities to be issued at some future date is part of the consideration for the disposal of a business (an “earn-out right”), a chargeable gain will arise on the difference between the right to receive those securities and their value when issued.
1787.When the securities are eventually disposed of, a deep discount may arise on the difference between the value of the right when granted (as for the chargeable gain described above) and the disposal proceeds. But this may include the increase in value that has already been included in the computation of a chargeable gain. By making the acquisition value for the deep discount legislation the same as the disposal value of the right for capital gains tax purposes, the double counting of that proportion of the discount for income tax purposes is avoided.
1788.The provision is rewritten by providing the valuation rule for securities issued as a “qualifying earn-out right” in subsection (2) and then defining a “qualifying earn-out right” in subsections (3) to (6).