Most property sales involve a straightforward exchange of a fixed price for the title. But some transactions — particularly sales to developers, sales of land with planning potential, and commercial-to-residential conversions — involve a price that depends on future events. This creates deferred consideration, and the CGT rules can produce unexpected results.
What is deferred consideration?
Deferred consideration is any part of the sale price that you do not receive at completion. It falls into two broad categories:
Certain deferred consideration: A fixed sum you will receive at a known future date. You know exactly how much and when.
Contingent deferred consideration: A sum that depends on a future event — for example, an overage clause that pays you an additional amount if planning permission is granted within five years, or a payment linked to the number of units a developer builds on your land.
The CGT treatment differs between these two types.
Certain deferred consideration
If you are entitled to receive a fixed sum in the future, the full amount is treated as part of the proceeds at the date of disposal. You are taxed on the whole expected receipt in the tax year of the sale, even if you only receive part of it immediately.
This means you may owe CGT on money you have not yet been paid. If you sold a property for £300,000 (£200,000 now and £100,000 in two years), you are taxed on £300,000 of proceeds in the year of the sale. You need to ensure you have the cash to pay the tax.
Contingent deferred consideration: the Marren v Ingles principle
For contingent consideration, the position is more nuanced. Where the future payment is genuinely uncertain — depending on an event that may or may not occur — HMRC accepts that the right to receive that future payment is itself an asset with a current value.
At the date of disposal, you are taxed on the value of the right to receive the contingent sum (its present discounted value, taking into account the likelihood of the event occurring). If and when the contingent sum is actually paid, there is a further disposal of the right to receive it. This can create a second CGT event.
This principle comes from the case of Marren v Ingles [1980]. In practice, valuing the right to receive a contingent sum at the date of disposal is complex and often contested with HMRC.
Overage clauses
Overage (also known as clawback) is particularly common in land and development sales. A seller retains a right to receive an additional payment if the land obtains planning permission or is developed within an agreed period.
At the date of the original sale, the value of the overage right is included in the proceeds. When the overage is actually triggered and paid, there is a disposal of the right to receive the payment, creating a further CGT event. Each overage payment is a separate disposal.
The 60-day return problem
If the original property disposal triggers the 60-day return obligation, the return must be filed within 60 days of completion. At that point, the full value of any certain deferred consideration must be included, and a reasonable estimate of the value of any contingent right must also be considered.
This can create a filing obligation where the proceeds are not fully known. The return should use the best estimate available at the time, with an amendment filed later if the position changes.
Documentation and evidence
For deferred consideration situations, keep:
- The sale contract, including any overage, earn-out, or deferred payment clauses
- Any independent valuations of the deferred right at the date of disposal
- Records of all payments received under the agreement
- Correspondence with the buyer regarding future payments
If you have sold a property with an overage clause or other deferred consideration and need to file a 60-day return, the calculation requires careful analysis of the deferred element. Start your return at LetsFile — the Chartered Accountant/Chartered Tax Advisor reviews all elements of the consideration before filing.