562 Contingent liabilities

Summary

This section is primarily an anti-avoidance provision directed against the introduction into a contract for the disposal of an asset of a contingent liability on the person disposing of the asset which both parties know is unlikely to materialise. The method of dealing with the device is to disregard the contingent liability in computing the gain or loss on the disposal in the first instance and to give an adjustment only if the liability is actually paid.

This section may also apply to transactions which are not designed to avoid tax as, for example, under subsection (1)(b), where the “other obligation” is an agreement to buy back in certain genuine circumstances such as failure to get planning permission. Such a contract differs very little from a conditional contract covered by section 542(1)(b) and concessional treatment may be granted to remove any genuine hardship.

Details

(1) The contingent liabilities to which the section applies are —

• a liability assumed by the lessor under a lease in respect of a default by the lessee as, for example, a failure to comply with by-laws relating to property,
• a liability assumed by the vendor of land for quiet enjoyment or other obligation as, for example, where a grocer sells a shop to butcher and covenants not to start a butcher’s shop himself in adjoining property which he owns, and
• a contingent liability in respect of a warranty on a sale or lease of any property other than land.

In the first instance no allowance is to be made under section 552 in the computation of a chargeable gain or allowable loss for the fact that the person disposing of an asset may have retained or assumed a contingent liability of a kind mentioned above.

(2), (2A) Where, however, the contingent liability is enforced, any expenditure incurred by reason of its enforcement is to be deducted from the consideration and the gain or loss recomputed accordingly. An adjustment of the charge to tax as a result of the recomputation is to be made by discharge of tax, repayment or set off. A claim for an adjustment must be made within 4 years from the end of the chargeable period in which the contingent liability is enforced. No adjustment will be made unless the contingent liability is actually paid.

(3) Subsection (2) is to apply notwithstanding the general time limit for making a claim for a repayment of tax contained in section 865.

Relevant Date: Finance Act 2021