Income Tax (Trading and Other Income) Act 2005 section 442

Securities issued in accordance with qualifying earn-out right

Section 442 deals with how to determine the acquisition cost of a security issued under a qualifying earn-out right, so as to prevent the same gain being taxed twice — once under capital gains tax and again as income tax on deeply discounted securities.

• When a security is issued under a qualifying earn-out right, its acquisition cost is the market value of the right immediately before issue plus any amount payable on issue
• A qualifying earn-out right arises where the right to receive future securities forms all or part of the consideration for selling shares, debentures, a business, or an interest in a business
• The right must either entitle the holder to be issued with securities of another company, or be capable of being satisfied by the issue of such securities
• The value of the consideration at the time the right is granted must be unascertainable, reflecting the contingent nature of earn-out arrangements