Home > Projects > Business Tax > A Valuation of a Trading Company

The Problem

An individual had sold shares in their trading company. Consideration for the disposal was made up of cash payments, and an Earn Out.

The Earn Out was not a guaranteed payment, and was contingent on figures from the accounts 12 months from the date of completion. An exact amount payable under the terms of the Earn Out was not ascertainable at the date of completion.

The individual qualified for Business Asset Disposal Relief (BADR) on the gain attributable to consideration on the sale of their shares (i.e. capital gains tax at 10%).

Small money

The Solution

The Earn Out, being the right to future consideration, was itself part of the consideration paid for the shares. Therefore, in calculating the capital gain on the disposal of the shares (and what would qualify for BADR), it was necessary to undertake a valuation of the Earn Out.

This involved understanding the terms of the Earn Out, and potential issues and uncertainties at the date of sale that might affect the consideration payable under the Earn Out.

A valuation was prepared, and this valuation was utilised to calculate the capital gain on the sale of their shares.

The Result

The individual obtained BADR on all the consideration payable on disposal of their shares, including the value attributable to the Earn Out.

When the Earn Out was paid 12 months later, there was a second capital disposal of the Earn Out right. This resulted in a small capital gain, that did not qualify for BADR.

An accurate valuation of the Earn Out right ensured that the majority of the sale proceeds obtained BADR at the date of sale, mitigating the overall tax payable on the sale of the shares.