The use of deferred consideration structures in share sales has become increasingly relevant in the current market environment. This can have various commercial advantages for both buyers and sellers, for example allowing sellers to achieve a (potentially) higher total consideration for their business while enabling buyers to bridge the valuation gap by offering a lower upfront payment and deferring a portion of the consideration, possibly based on future performance of the target business.   There will be various commercial points for both parties to consider in a deferred consideration structure, including uncertainty around future performance and availability of funds, and such structures can require careful contractual drafting in order to appropriately protect the interests of all involved.


In addition to these points the parties should also consider the tax treatment of the deferred consideration structure.  While the terms of the deferred consideration will ultimately come down to the commercial negotiations it is important to think about the tax treatment of such consideration structures upfront to prevent any unexpected surprises when it’s time to submit the relevant tax returns.   


While there are various tax points to think about (not least what the stamp duty position could be for the buyer) this article focusses on the capital gains tax treatment for the sellers in respect of deferred cash consideration.


Capital gains tax treatment 

The capital gains tax position for sellers will depend on the facts in any particular case and personal tax advice should always be sought to reflect any individual seller's circumstances but, broadly, the capital gains tax treatment will depend on on whether the amount of deferred consideration payable (or potentially payable) is known (or ascertainable) at the time of completion of the sale of the shares.


Ascertainable consideration

Where the amount of any deferred consideration is known (or ascertainable) at the time of completion, even where the payment of such consideration is contingent on a future event, generally the full amount of the consideration should be brought into account in calculating the chargeable gain at the time of the sale of the shares and capital gains tax paid on that basis.    For example, this treatment should apply in respect of the following types of consideration:


  • an agreement to pay an additional £1 million consideration in 6 months’ time,
  • an agreement to pay an additional £600,000 when planning permission is granted.


If the consideration later turns out to be irrecoverable the seller should be able to claim a refund of any overpaid tax. 


From a practical perspective it is worth thinking about the timing of deferred consideration payments and whether any tax will need to be paid before the deferred consideration is received.   Capital gains tax is generally payable by 31 January in the year following the year in which the tax year ends – in some circumstances the deferred consideration may therefore have been paid (or found to be irrecoverable) before the due date for the tax.   Where this is not the case, sellers will need to ensure they retain enough funds from the upfront consideration to pay the tax when it falls due.



Where the amount of the deferred consideration is not known and cannot be determined at the time of completion the tax treatment is different. This could be the case where the amount of deferred consideration payable depends on the future performance of the business, often referred to as an earn-out.  An example of this type of consideration would a further payment due one year following completion of an amount equal to 5% of the profits of the business in excess of £100,000 for that year.


In such circumstances the right to receive that consideration is generally treated as a separate asset for capital gains tax purposes – the ‘earn-out right’.  This type of deferred consideration would therefore involve two disposals for capital gains tax purposes:


  1. at the time of the sale of the shares the consideration received for capital gains tax purposes will include the market value of the earn-out right,
  2. when the deferred consideration is actually paid this will be treated a disposal of the earn-out right for an amount equal to the actual consideration received.  Any gain (or loss) for tax purposes will be calculated as the difference between the amount of deferred consideration actually received and the market value of the earn-out right which was brought into account on disposal of the shares.


It can therefore be seen that it will be important to accurately assess the market value of the earn-out right at the time of the sale of the shares.  A high value will result in higher upfront tax but the potential for a loss if the earn out right does not pay out in full, a low value will reduce the upfront tax bill but may result in additional tax liabilities later.


It will also be important to be aware of how this type of deferred consideration structure could impact on any reliefs which may be available to a taxpayer on the sale of shares.   For example, while the sale of share could potentially qualify for business asset disposal relief (if all the relevant conditions are met) and therefore be taxed at a lower rate, the disposal of the earn-out right would not qualify as the earn-out right would not be a qualifying asset.  Where reliefs are relevant appropriate advice should be sought early.


Risk of employment income tax

Where deferred consideration is payable to shareholders who are also employees or directors of a company (which is often the case) it will also be important to consider whether that consideration could be reclassified as employment income.   This could potentially be the case if, for example, the payment of the deferred consideration is linked to the personal performance of an individual or to an individual’s ongoing employment with the company.  The analysis of this risk can be complex and is fact specific but it always something which should be considered.



The use of deferred consideration structures in share sales offers potential benefits to both buyers and sellers, but it also introduces complexities. The tax implications of these structures are critical and advice should be sought upfront to prevent unexpected tax liabilities.