C3.1307A Business asset disposal relief—earn-outs and deferred consideration
When a company is sold, it is common for the purchaser to defer payment of some of the purchase price until the results of the current, and sometimes subsequent, trading periods are known. The amount finally payable may vary according to the results of the business and this is known as an earn-out.
Structure of earn-out
Such earn-outs have invariably been structured for tax purposes, so that once the agreed targets are achieved, rather than paying cash, the purchaser would issue loan notes (or occasionally shares) to the sellers. The loan notes would typically be held for at least six months and would then be cashed in. This is in order to fall within TCGA 1992, s 138A (see D6.208A, D6.208B), whereby any capital gains tax that would have arisen on the value of the earn-out consideration is deferred until it is encashed. When the loan notes or shares are sold, part of what is received is the earn-out right, which is deemed to be a security, and when the earn-out is determined, this deemed security is exchanged for shares and loan notes in the purchaser company. Capital gains tax would be payable at the appropriate CGTrate (see C1.107) when the loan notes are encashed.
The business asset disposal relief legislation (previously known as entrepreneurs' relief before April 2020) does not contain any special rules in connection with earn-outs although
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