Beyond the main commercial compentents of any Limted company sale, if the sale proceeds are paid in one intial payment and the remainder in installments over a future period of time, the sellor should also mindful of the Captial Gains Tax (CGT) implications of that deferred consideration.
CGT Treatment
Generally, the CGT treatment depends on whether the deferred consideration is known (or ascertainable) or not known (or Unascertainable) at the time of the share sale
Ascertainable Consideration
When the future deferred consideration componant of any deal is known/determined at the time of the sale regardless — the whole consideration amount is normally brouhght into a charge for CGT purposes at the date of the intial the share agreement.
If the deffeered consideration eventually proves not to be paid, then the seller can claim a revist the intial assessmet and claim a repayment of any overpaid CGT. Therefore when entetign into such a deal the sellor needs to ensure they can cover the CGT arising for entire amount of consideration including the future epected deffered payments. The CGT is normally all payable by 31 January after the and of the tax which it relates. i.e. Sale deal tax place 30 May 2024, this falls into the 2024/2025 Tax year with CGT payable by 31 January 2026.
Unascertainable Consideration
If the deferred consideration amount is not known can not be established at the time of the share sale, this is commonly referred to as an "earn-out" then, the right to receive future consideration is treated as a separate disposal from the initial share sale.
This results in two chargeable disposals for CGT purposes, which is a detailed and complex process involving the vauation of the sales and other nucanes.
At the time of the share sale, the market value of the earn-out right is included in the CGT calculation.
When the deferred payment is actually received, it constitutes a disposal of the earn-out right, with CGT calculated based on the difference between the deferred amount received and the previously calculated market value.
Reclassification as Employment Income
When deferred consideration is paid to shareholders who are also employees or directors, there can be risk of HMRC viewing any future payments as employment income if the deferred payment is linked to the individual’s performance or continued employment with the company shares they have sold.
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