Selling Your Company In Stages: How Earn-Outs Are Taxed And When The CGT Falls Due
Selling Your Company in Stages: How Earn-Outs Are Taxed and When the CGT Falls Due in the UK
When a company is sold with part of the consideration deferred and linked to future performance, Capital Gains Tax (CGT) does not simply wait until all the cash arrives. For the 2026/27 tax year, the default rule is that the entire disposal is treated as occurring on the completion date, with the earn-out right valued at its open market value on that date and taxed accordingly. Whether Business Asset Disposal Relief (BADR) applies at 18% or CGT falls at the higher rate of 24% depends on the facts at completion, not at the point when earn-out payments are eventually received.
The Basic CGT Position on an Earn-Out Disposal
Under section 48 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), where the consideration for a disposal includes a right to receive future amounts that are ascertainable at the date of disposal, those amounts are included in the proceeds at their present value. The disposal is a single event, occurring at completion, and the full consideration including the estimated future amounts is assessed in the tax year of that completion date.
Where the earn-out is unascertainable at the date of disposal (because the future payments depend on conditions that cannot be valued with certainty), the earn-out right itself is a separate asset, acquired at completion at a nominal or market value, and each earn-out payment received is subsequently treated as a disposal of that right.
The distinction between ascertainable and unascertainable earn-outs drives significantly different tax timing and, in some cases, different tax rates.
What Makes an Earn-Out Ascertainable or Unascertainable?
An earn-out is ascertainable where the future consideration can be calculated with certainty at the date of completion, even if payment is deferred. A simple three-year deferred payment of a fixed £500,000 on a specific date, subject only to the business surviving, is likely ascertainable. The present value is discounted for time but the amount is known.
An earn-out is unascertainable where the future payments depend on conditions that cannot be valued, typically performance targets such as EBITDA thresholds, revenue milestones, or client retention metrics. The actual payment might be anywhere between zero and £2 million depending on how the business performs. HMRC's Capital Gains Manual at CG14900 confirms that in such cases the earn-out right is a chose in action acquired at completion, with its own separate CGT life.
The practical consequence is that selling a business today with an unascertainable earn-out means CGT is not all payable now. It arises in stages as the earn-out right is disposed of (which happens when each payment is received from the buyer, constituting a part-disposal of the right).
About the Widget: Designed by Pro Tax Accountant, this interactive explainer demystifies the complex UK Capital Gains Tax (CGT) rules governing phased company exits and deferred earn-outs for the 2026/27 tax year. It clarifies how upfront consideration, ascertainable deferred cash, and unascertainable performance-linked rights are taxed, highlighting critical pitfalls such as the Business Asset Disposal Relief (BADR) asymmetry and the risk of unrecoverable overestimates. Simply toggle between structural models or input your upfront proceeds and anticipated earn-out figures into the dynamic timeline to forecast your exact liabilities, annual exemption usage, and HMRC Self Assessment payment deadlines.
Business Asset Disposal Relief and the Earn-Out Timing Problem
Business Asset Disposal Relief (BADR) reduces the CGT rate to 18% on qualifying disposals of shares in trading companies, provided certain conditions are met. For 2026/27, the BADR lifetime limit is £1 million. The qualifying conditions require the individual to have held at least 5% of the ordinary share capital and voting rights for at least two years ending at the date of disposal, and to have been an employee or officer of the company throughout that period.
The critical point for earn-outs is that BADR is determined at the date of the qualifying disposal, which is completion. Whether each subsequent earn-out payment qualifies for BADR depends on whether BADR was available for the original share disposal at completion, and whether the relevant conditions continued to be met.
HMRC's guidance on Business Asset Disposal Relief on GOV.UK confirms that where the earn-out involves a right to unascertainable future consideration, each receipt is treated as a further disposal of the right rather than as proceeds from the original share disposal. This raises the question of whether BADR applies to those later disposals.
The answer is that a right to future consideration arising from the disposal of shares does not itself qualify as a business asset for BADR purposes, unless the payments received are structured in a specific way. Most unascertainable earn-out rights are treated as personal choices in action, and as such they are standard CGT assets attracting the normal rates of 18% or 24% rather than the BADR rate of 18%.
This creates a genuine asymmetry. The initial proceeds (if BADR-qualifying) are taxed at 18%. The earn-out receipts are taxed at 18% for basic rate taxpayers or 24% for higher rate taxpayers. If the seller expects to receive significant earn-out over several years and their income will be high during that period, the effective tax rate on the earn-out can be materially higher than on the upfront consideration.
The Election for Loan Notes or Qualifying Corporate Bonds
Where the earn-out is structured as loan notes rather than as a deferred cash right, different rules may apply. Qualifying Corporate Bonds (QCBs) are outside the CGT regime entirely; gains and losses on QCBs are not chargeable. If an earn-out is structured as QCB loan notes, CGT on the original disposal crystallises at completion and is then held over, with the held-over gain becoming chargeable when the notes are redeemed or disposed of.
Non-QCB loan notes, such as those that are convertible or that carry rights beyond a simple debt obligation, are treated differently. The seller can make an election under section 135 or 137 TCGA 1992 to defer the gain on the loan notes through the share exchange rules, meaning no CGT arises at completion and the gain rolls into the loan notes, crystallising when they are eventually redeemed.
The choice between QCB and non-QCB notes, and whether to make a section 135/137 election, is a decision that needs to be made at the structuring stage, well before completion. Both choices affect the timing of the CGT charge and potentially the rate. BADR availability on the deferred gain via non-QCB loan notes can be preserved in some circumstances, which is not possible on unascertainable cash earn-outs.
CGT Timing: When Does the Tax Fall Due?
For completions occurring in the 2026/27 tax year, CGT arising on the disposal is due by 31 January 2028. Self Assessment for 2026/27 must be filed online by that date, and any CGT liability must be paid. This includes the CGT on any ascertainable earn-out amounts, valued at completion, and on the uplift from estimates made on ascertainable amounts that have since turned out to be higher.
For earn-out receipts received in subsequent tax years, the CGT position is:
Where the earn-out right is unascertainable at completion, each receipt is a part-disposal of the right. The gain on each receipt is computed using the original market value of the right at completion as the base cost (allocated between receipts as they arrive), and is reported in the Self Assessment return for the tax year in which the receipt occurs.
The CGT Annual Exempt Amount (AEA) is £3,000 for 2026/27. This can be set against gains from earn-out receipts in each tax year they arise, in addition to any other CGT gains in that year. Using the AEA across multiple years of earn-out receipts is one practical efficiency in extended earn-out structures.
The Overestimates Problem: When the Earn-Out Comes in Below the Estimated Value
Where an earn-out right was valued at, say, £800,000 at completion (triggering CGT on that amount in the completion year) but the actual receipts only total £400,000, the seller has overpaid CGT. The mechanism for correcting this is a capital loss on the disposal of the earn-out right in the year when it becomes clear the right is worth less than originally estimated. The loss can then be set against other gains in the same or future tax years.
This creates a cash-flow mismatch: the seller paid CGT on £800,000 in the completion year but eventually received only £400,000. They must wait to realise the loss, which may be in a later tax year when the earn-out period ends, and then set it against other gains. If they have no other gains in that year, the loss carries forward indefinitely, but cannot be carried back to recover the CGT already paid on the original over-estimated amount.
This is a frequently underestimated risk. Sellers who accept a high earn-out estimate at completion to minimise the appearance of the upfront tax bill can end up with a larger actual tax cost than sellers who pushed for a more conservative valuation. The correct approach is to value the earn-out right conservatively at completion, meaning the initial tax bill is lower, and to take the additional gain in later years when earn-out payments exceed the conservative estimate.
Where Scottish Taxpayers Face a Different Position
CGT is not a devolved tax and the CGT rates are the same across the UK: 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers on shares and other non-residential assets in 2026/27. The rate applicable to any individual gain depends on the individual's total income for the tax year in which the gain arises, which includes all UK sources.
For Scottish taxpayers, total income for CGT band-stacking purposes is calculated using Scottish income tax bands for determining whether the taxpayer has remaining basic rate capacity. However, because Scottish income tax bands and rates differ from the rest of the UK, the threshold at which a Scottish taxpayer moves from the 18% CGT rate to the 24% CGT rate may differ from a taxpayer in England or Wales. The GOV.UK guidance on Capital Gains Tax rates explains the band-stacking mechanism. For a Scottish higher-rate taxpayer who pays income tax at 42% on earnings above £43,662 in 2026/27, any capital gain is automatically taxed at 24% rather than 18%, whereas an equivalent earner in England would have a much wider basic rate band before the 24% rate applied.
This means that Scottish business owners selling companies with earn-out arrangements may find that earn-out receipts received in years when their income remains high are entirely at 24% CGT, whereas the same structure for an England-based seller might have some earn-out falling within the basic rate band at 18%.
About the Widget: This interactive explainer widget guides UK taxpayers through the Capital Gains Tax treatment of company sales involving earn-outs in the 2026/27 tax year. It clearly distinguishes between ascertainable and unascertainable earn-outs, explains when CGT falls due, how Business Asset Disposal Relief applies (or does not), the role of loan notes, and practical steps to take before signing. Simply click the tabs at the top to explore each topic, use the toggle buttons to compare key concepts, and try the quick calculator for an illustrative estimate of tax on the initial disposal. Created by Pro Tax Accountant, the widget is designed for clarity and ease of use on any device.
Practical Steps Before Signing the Sale Agreement
The CGT position on an earn-out is largely determined by structuring decisions made before heads of terms are agreed, not after. The key questions are: whether the earn-out is ascertainable or unascertainable; whether loan notes rather than cash rights are preferable; whether BADR applies to the upfront consideration and, if so, whether the earn-out structure preserves any BADR benefit on later receipts; what the conservative valuation of the earn-out right at completion would be; and how the seller's income profile in future years affects the CGT rate they will pay on earn-out receipts.
HMRC does not prescribe a fixed method for valuing an unascertainable earn-out right at completion. The seller and HMRC may agree on a value, or the value may be challenged during a compliance check. Where significant amounts are involved, obtaining a professional valuation opinion at the time of the sale, documented and available for HMRC inspection, is considerably more defensible than an estimate constructed retrospectively.
The HMRC Capital Gains Manual guidance at CG14900 onwards sets out HMRC's detailed analysis of earn-out structures and is the authoritative reference for any adviser or business owner reviewing how a specific earn-out arrangement will be taxed.
Key Takeaways
For the 2026/27 tax year, CGT on a company sale is charged at 18% (basic rate) or 24% (higher/additional rate), with BADR at 18% on the first £1 million of qualifying gains.
Where an earn-out is ascertainable at completion, the full estimated value is included in the disposal proceeds and taxed in the tax year of completion. CGT is due by 31 January following the end of that tax year.
Where an earn-out is unascertainable, the earn-out right is a separate asset acquired at completion at market value. Each receipt is a part-disposal of that right, taxed in the year received. BADR does not generally extend to the earn-out right itself.
Overestimating the earn-out right at completion front-loads CGT and creates a potential loss if actual receipts are lower, with no carry-back available. Conservative estimates reduce the completion-year tax and allow gains to be recognised as earn-out payments arrive.
Loan note structures offer an alternative timing mechanism. QCBs crystallise the gain at redemption with the original held-over gain becoming chargeable then. Non-QCB notes under a section 135/137 election roll the gain forward, potentially preserving BADR on later redemption in appropriate cases.
The choice between these structures should be made before contracts are signed. Restructuring an earn-out arrangement post-completion is rarely possible without triggering the CGT the structure was designed to manage.
FAQs
When do I pay CGT on an earn-out payment from selling my company?
If the earn-out is ascertainable at the date you sold the company, CGT falls due on the full estimated value in the tax year of completion, regardless of when you actually receive the money. If it is unascertainable, each payment you receive is a disposal of the earn-out right in the year you receive it, and CGT is assessed in that year. CGT must be paid by 31 January after the end of each relevant tax year.
Does BADR apply to earn-out payments received after the company sale completes?
Generally no. BADR is determined at the date of the qualifying disposal (completion). The earn-out right acquired at completion is not itself a business asset for BADR purposes, so subsequent earn-out receipts are typically taxed at 18% or 24% depending on the seller's income position, not at the BADR rate.
What is an unascertainable earn-out?
An earn-out is unascertainable where the future payments depend on performance conditions (such as profit or revenue targets) that cannot be calculated with certainty at the date of sale. The actual payment might be anywhere in a range. HMRC treats the earn-out right as a separate asset, and each receipt is a part-disposal of that right.
What happens if my earn-out payments come in lower than the value calculated at completion?
If actual receipts are lower than the value attributed to the earn-out right at completion, a capital loss arises when the right is disposed of in full. That loss can be set against other capital gains in the same or future tax years. There is no carry-back, so if you paid CGT on an over-estimated earn-out in the completion year, you must wait for the loss to arise before recovering any tax.
Can loan notes help me spread the CGT on an earn-out?
Yes, in some circumstances. Non-QCB loan notes under a section 135 or 137 TCGA 1992 election allow the gain to roll into the notes, with CGT arising when the notes are redeemed rather than at completion. QCBs are exempt from CGT while held, with the held-over gain crystallising on disposal. Each structure has different consequences for BADR and the rate payable. The choice must be made before contracts are signed.
Is the CGT rate different in Scotland for earn-out payments?
The CGT rates themselves (18% and 24%) are the same across the UK. However, the threshold at which a Scottish taxpayer moves from the lower rate to the higher rate is determined by Scottish income tax bands, which differ from England and Wales. Scottish higher-rate taxpayers (income above £43,662 in 2026/27) will generally have earn-out receipts taxed at 24%.
How is the earn-out right valued at the date of completion?
The earn-out right is valued at its open market value on the date of the company sale. There is no prescribed HMRC method. A professional valuation based on the probability-weighted expected payments, discounted to present value, is the most defensible approach. The value should be documented at the time of the sale, not estimated retrospectively.
What if the earn-out depends on me staying with the business after the sale?
Where earn-out payments are contingent on the seller's continued employment, HMRC may argue that some or all of the payments are employment income rather than capital receipts. If the earn-out is tied to services provided post-sale rather than purely to the value of the business sold, the income tax treatment at the seller's marginal rate may apply instead of CGT. This is a significant risk that must be managed carefully in the drafting of the sale agreement.
About the Author:
Adil Akhtar, ACMA, CGMA, FCMA (membership ID is 990250923) serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than eighteen years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants (registered with Companies House), combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
Disclaimer: This article sets out the general position under UK tax law for the 2026/27 tax year. The information has been checked against HMRC guidance and other official sources at the date shown above, and is reviewed when the rules change. Tax legislation is complex and outcomes depend on your individual circumstances, so this article is provided for general information and does not constitute advice on which you should act. Any figures or worked examples are illustrative. Before making any decision, obtain advice specific to your situation from a qualified professional. Pro Tax Accountant accepts no liability for loss arising from reliance on this article alone.
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