Dealing with Different Types of Sale Consideration

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| Courtney Price

When selling an owner-managed company, the form of sale consideration can significantly impact both the seller's immediate financial return and their tax liabilities.

In Tax Structuring on Owner-Managed Company Sales, Peter Rayney explained how understanding the nuances of each type of consideration—cash, paper, and earn-outs—is crucial for making informed decisions that align with your financial goals and tax planning strategies.


Cash is often considered the most straightforward and desirable form of sale consideration. It provides immediate liquidity to the seller, allowing them to reap the benefits of their years of hard work without delay. When a company is sold for cash, the seller typically receives the full amount on completion of the sale, which is subject to capital gains tax (CGT) at the time of the transaction.

However, it's not uncommon for part of the cash consideration to be deferred. In such cases, a portion of the sale price is paid over time, according to a predetermined schedule. This deferred consideration is still fixed and quantifiable, and its CGT treatment falls under section 48 of the Taxation of Chargeable Gains Act (TCGA). While this may spread out the tax liability over several years, sellers must ensure they have sufficient funds to cover the tax due each year.


Paper consideration involves receiving shares or loan notes in the acquiring company instead of cash. This method defers the capital gain, as the gain is rolled over until the paper is converted into cash. For example, if loan notes are issued and encashed over time, the capital gain is recognised and taxed at each stage of encashment.

Accepting paper consideration can be complex and requires careful consideration. Sellers should seek investment advice, as they are effectively becoming investors in the acquiring company. The tax implications also change depending on whether the paper is classified as Qualifying Corporate Bonds (QCBs) or non-QCBs, with non-QCBs being treated similarly to shares for tax purposes.

One critical point to note is that paper consideration may not qualify for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief, unless specific elections are made. BADR can significantly reduce the CGT rate on qualifying assets, so understanding these rules is essential.


Earn-outs are used to bridge the valuation gap between what the seller believes their company is worth and what the buyer is willing to pay upfront. They involve additional payments to the seller based on the future performance of the business, typically tied to profits or other financial targets.

While earn-outs can help sellers achieve a higher total sale price, they come with risks and complexities. The initial tax charge occurs on day one, based on the total potential earn-out, although adjustments can be made if the full earn-out is not realised due to events like buyer insolvency. Sellers must be cautious, as they could face a significant tax bill without the corresponding cash if the earn-out targets are not met.

Moreover, earn-outs can lead to disputes if the seller feels the buyer is manipulating the business to reduce the earn-out payment. Therefore, it's crucial to have protective clauses in place to mitigate such risks.

When considering the sale of an owner-managed company, sellers must weigh the immediate benefits of cash against the deferred benefits and potential tax advantages of paper and earn-outs. Each option carries its own set of financial implications and tax considerations, and the right choice will depend on the seller's individual circumstances and long-term objectives. Consulting with tax advisors and legal professionals is highly recommended to navigate these complex decisions effectively.

For the full session, please click here. In this course, Peter Rayney covers the following topics;

  • Transaction structure – sale of assets v sale of shares
  • Detailed tax treatment of share sales
  • Dealing with different types of sale consideration
  • Optimising Business Asset Disposal Relief
  • Examining earn-out arrangements

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

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About the Author

Courtney Price is a content creator for CPDStore UK. Courtney joined us during the COVID-19 pandemic and has been involved in the ever-evolving world of accounting ever since. Her passion for reading and writing, coupled with her degree in copywriting from Vega School has allowed her to channel her creativity and expertise into crafting engaging and informative content.


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