Understanding Deferred Consideration for Capital Gains Tax (CGT)

When selling a business or asset, it’s common for the sale price to include future payments—these are known as deferred consideration. From a Capital Gains Tax (CGT) perspective, how these payments are treated depends on whether the amounts are ascertainable (known or calculable at the time of sale) or unascertainable (uncertain or performance-based).

This guide breaks down the CGT implications of deferred consideration and how different structures impact your tax position.

What Is Deferred Consideration?

Deferred consideration refers to part of the sale proceeds being received after the completion date. This often happens in business sales, where a buyer pays an upfront sum followed by one or more future instalments—typically linked to earnings, revenue, or other performance targets.

Ascertainable vs Unascertainable Consideration

Ascertainable Consideration

• Definition: The amount can be calculated or determined at the point of sale—even if it’s paid later.
  
• Tax Treatment: The full amount is taxed in the year of the disposal.
  
• Example: A sale includes £100,000 upfront plus 5% of turnover for the year ending 31 March. Even if the turnover isn’t known yet, it’s measurable—so all proceeds are treated as ascertainable.
  

Key Point: No discount is applied for the risk of non-payment or time delay. If the amount later proves unrecoverable, relief may be available under s.48 TCGA 1992 within four years of it becoming irrecoverable.

Paying CGT by Instalments

Where consideration is ascertainable and paid over time, s.280 TCGA 1992 allows sellers to apply to pay CGT in instalments—if certain conditions are met:

• Payments begin no earlier than the disposal date
  
• Payments are spread over more than 18 months
  
• Payments continue past the normal tax due date
  

Instalments are calculated as the lower of 50% of each amount received or the remaining CGT liability. However, the tax must be fully paid by the earlier of:

• The date of the final payment
  
• Eight years after the normal due date
  

Example: Instalment Relief in Action

Joan sells her company for £5m in ten six-monthly instalments. CGT of £900,000 is due. Her tax is spread across instalments aligned with payment receipts, easing cash flow and aligning tax with income.

Unascertainable Consideration (Earn-Outs)

Definition

The amount can’t be determined at the time of sale. This typically applies to performance-based payments or earn-outs.

Tax Treatment

• The right to future payments is valued at the date of disposal and included in the CGT calculation.
• Each actual payment later received is treated as a part disposal of the right.
• Gains or losses arise on the difference between actual payments and the proportion of the original valuation.
  

Key Consideration:

Valuing the right accurately at the outset is essential. Overestimating may trigger a tax overpayment (potentially unrecoverable). Underestimating could result in additional taxable gains down the line.

What About Reliefs?

• Business Asset Disposal Relief (BADR) may apply to the initial disposal, but not to later disposals of the earn-out right.
• If future payments are linked to employment or ongoing performance, there’s a risk HMRC may reclassify them as employment income—subject to income tax and NICs instead of CGT.
  

Example: CGT on Unascertainable Deferred Payments

Dennis sells his business for £700,000 upfront + 10% of turnover over the next 2 years. He values the earn-out rights at £500,000 and includes £1.2m as proceeds in his 2023–24 return.

Future payments result in part disposals:

• If he receives £260k the next year, he calculates a gain or loss by allocating part of the £500k base cost.
• If the final payment is below expectations, he may realise a capital loss—but cannot claim s.48 relief. Instead, loss carry-back under s.279A-D may be available if strict conditions are met.

Deferred consideration adds complexity to CGT planning. Whether payments are fixed or uncertain, sellers must carefully assess their tax position and understand:

• When CGT is due
  
• Whether instalment relief applies
  
• If any CGT reliefs (e.g. BADR) are available
  
• How to handle earn-out valuations to avoid future tax surprises
  

Professional advice is crucial—especially where the future payments are significant or structured in performance-linked ways.

Need help navigating deferred consideration and CGT?
Speak to a tax adviser to structure your sale efficiently and avoid unintended liabilities.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG