Types of upfront consideration
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Publication: Article When it comes to selling your business, it is not always as simple as walking away with cash. You might be offered other forms of consideration, and they come with their own tax implications.
If you are offered earn outs, or deferred consideration, we recommend reading this article. You will need to carefully consider your cashflow position to ensure you are able to satisfy your tax liabilities.
Cash
As you would expect, the receipt of upfront cash is liable to Capital Gains Tax (CGT). Should you qualify, Business Asset Disposal Relief (BADR) would reduce your CGT liability.
The tax on your disposal is due by 31 January following the end of the tax year in which you disposed of the business. So, if your disposal happens between 6 April 2024 and 5 April 2025, the tax will be due to HMRC by 31 January 2026.
Shares
Besides cash, you might be offered shares in the buyer’s business — ordinary shares, preference shares or both.
The receipt of shares (ordinary or preference) on a disposal is considered a ‘share for share’ exchange. By default, CGT is not due on the receipt of new shares. It will only arise on the future disposal of them.
However, if your first disposal qualifies for BADR, you can elect to pay CGT on the full value of your new shares as if it were cash. This is a good option if you won’t qualify for BADR in the future because it secures the lower 10% rate on your new shares.
When you eventually dispose of the new shares, you will only pay CGT on the increase in value from the date you acquired them.
If by then the new shares have fallen in value, this is a capital loss. However, bear in mind that you won’t be able to reclaim your previously paid tax.
It is also important to note this is an all or nothing option. You pay tax on all the shares or on none of them. If it not possible to disapply the share for share rules up to the BADR limit.
Loan notes
The tax treatment of loan notes differs slightly depending on whether or not they are considered, for tax purposes, Qualifying Corporate Bonds (QCBs). A QCB must follow specific criteria for it to qualify. One of the key characteristics is that it is in sterling. QCBs cannot be converted or redeemed in any other currency.
In practice, many buyers offer non-QCBs, adding a clause for the availability of conversion into another currency.
The receipt of a non-QCB loan note is treated the same as shares i.e., as a share for share exchange. By default, no CGT will be due on receipt. It will be due later, at redemption or disposal.
As with shares, if your disposal qualifies for BADR, you can opt for the loan note to be treated as cash and pay the tax upfront.
QCB loan notes are treated slightly differently to non-QCB loan notes. The capital gain is calculated on the value received but does not crystalise until the future disposal of the QCB. The QCB itself is exempt from CGT, so if the value increases it will not be liable to CGT, only the crystalised gain.
As with non-QCBs and shares, you can opt to crystalise the gain at the point of receipt to secure BADR. And again, if you make loss, this is a capital loss. You cannot reclaim previously paid tax.
Other points to consider
In many disposals, the buyer will talk about the ‘rollover’ of your proceeds into the shares in the new business. Note that they not referring to HMRC’s ‘rollover relief’ (where you sell a business asset then re-invest the full proceeds into a new asset within three years). Instead, it is simply the interactions of a share for share exchange, and the share for share treatment above.
This is something you may wish to consider electing against when you report your gain if you are eligible for BADR and may not be in the future.
Alternatively, the buyer may ask you to re-invest in their business. The important nuance here is what you receive. If you receive cash on day one, then re-invest it in the business, HMRC will tax you as if you received all the cash up front, even if it did not specifically hit your bank account.
It is important to take professional advice on any deal you have been offered, and the Share Purchase Agreement, before signing it. Once you’re fully informed, the buyer may be happy to adjust the transaction and the wording of the Agreement to suit your tax circumstances.