Tax treatment of earn-outs and deferred consideration

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax treatment of earn-outs and deferred consideration
  • Date of disposal – reminder of basic rules
  • Employment related securities

This document discusses principles of ascertainable deferred consideration, unascertainable consideration, the Marren V Ingles principle and loss on disposal of right to receive future consideration.


The consideration for disposal for a business will often be simply in the form of cash. However, in many cases there may also be some form of deferred consideration, which may or may not tie key individuals into continuing to work for the business for a certain period of time. In such cases the deferred element of the consideration may be quantified at a later date, typically using an agreed formula – based on two or three years post acquisition profits. An arrangement such as this is known as an earn-out.

The way in which consideration for business sales is structured determines when tax falls due. There are special rules allowing the payment of tax in instalments in certain circumstances, which are covered towards the end of this guidance note.

Date of disposal – reminder of basic rules

The basic rule is that the date of disposal for capital gains tax is the date when there is an unconditional contract for sale. If a contract is conditional on a condition precedent, the date of disposal for CGT purposes is the date that all of the relevant conditions have been fulfilled. A condition precedent is an external condition, for example a contract for sale of land may be conditional on planning permission being granted. A condition subsequent is a condition between the parties to the proposed sale and does not trigger a disposal date for CGT purposes.

TCGA 1992, s 28(1), (2)

It is important to identify the correct date of disposal as this will determine in which tax year the gain will be charged. The date of payment of the sale proceeds is largely irrelevant for CGT purposes.

Ascertainable deferred consideration

As discussed above, it is common for consideration payable on the sale of a company to be split such that the vendor receives a

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