Earn-Out Tax Calculator — Business Sale Deferred Consideration

An earn-out is a deferred payment arrangement where part of the business sale price is paid over time (typically 1-5 years) based on the business achieving future performance targets (revenue, profit, EBITDA). It bridges the gap between the seller's and buyer's valuation by making part of the price contingent on future results.

This is the critical question. If the earn-out is purely consideration for the sale of shares (not linked to the seller's continued employment or services), it should be taxed as CGT when received. If it's conditional on the seller continuing to work for the business, HMRC may reclassify it as employment income taxable at income tax rates (up to 45%) plus NIC.

Business Asset Disposal Relief (BADR) can apply to earn-out payments that are taxed as CGT — but the timing of BADR claims is complex. BADR must be claimed by 31 January following the tax year in which the disposal occurs. If earn-out payments are received in later years, BADR on those amounts requires careful planning.

No election exists to pay CGT on the full earn-out amount upfront. HMRC treats each earn-out payment as a separate disposal when received. However, under the Marren v Ingles principle, the initial right to receive the earn-out is itself a chargeable asset, meaning there may be two CGT charges: one on the original sale and one on receipts varying from the initial valuation.

In Marren v Ingles [1980], the House of Lords held that the right to receive a future uncertain payment is itself a separate asset with a value at the time of sale. This creates two CGT events: (1) CGT on the sale of shares including the estimated value of the earn-out right, and (2) CGT on the difference between actual earn-out received and the initial estimated value of the right.

Yes, with careful structuring. Options include: loan notes (defer CGT), fixed vs contingent earn-outs, using corporate sellers (CT on profits rather than income tax on individual), ensuring payments are genuinely consideration (not salary disguised as earn-out), and timing payments around annual CGT exemptions. Always use specialist M&A tax advisers.

Since earn-out payments arrive over multiple years, they can be offset against annual CGT exemptions in each year (£3,000 for 2025/26). This can significantly reduce tax on smaller earn-outs. For example, £9,000 of earn-out over 3 years could be fully covered by the annual exemption — though this only works if you have no other capital gains.

If earn-out is treated as pure CGT, there is no NIC. If classified as employment income, both employee NIC (2% above UEL) and employer NIC (13.8% on total) apply. Employer NIC on earn-out payments received by a seller who is employed is an additional cost borne by either the buyer or deducted from the payment.

Instead of cash, earn-out payments can be structured as qualifying corporate bonds (QCBs) or loan notes. QCBs are exempt from CGT. However, this means the gain is crystallised on disposal of the business but is deferred until the loan notes are redeemed. If the buyer defaults, the gain is still taxable even if the notes become worthless.

If actual earn-out received is less than the initial estimated value of the earn-out right (under Marren v Ingles), there may be a capital loss on the earn-out right asset. This loss can be set against other capital gains. Conversely, if actual receipts exceed the estimate, additional CGT is payable on the excess.

For UK-resident individuals selling UK or foreign companies, the same principles apply. For non-UK residents selling UK shares, non-resident CGT (NRCGT) rules apply from April 2019 for direct/indirect UK property companies. Share sales by non-residents are generally only subject to UK CGT if the company holds significant UK real property.

Selling shares personally means CGT (10-24%). If the company structure allows, selling the business at corporate level means corporation tax (19-25%) on any company-level gains. Subsequent distribution to shareholders may trigger further tax. Whether this is beneficial depends on your specific circumstances — specialist M&A and corporate tax advice is essential.