Transaction Tax: Key Considerations Around Consideration


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Key Tax Considerations in Corporate Finance Transactions

In corporate finance transactions, the simplest way to sell a business is to sell the shares for cash on the date of completion. However, this is not always the most tax efficient or the most financially or commercially appropriate method for either the buyer or seller. As a result, there are a number of ways to structure a transaction  which does not call for all of the cash to be paid up front. In this brief note we introduce the tax issues which arise where the consideration for the shares is paid in tranches or at a later date.

  1. Types of Consideration

The type of consideration used to purchase the business will have a significant implication for capital gains tax (“CGT”). The most popular forms of consideration used to purchase a business are:

  • Cash;
  • Loan Notes;
    • Qualifying corporate bonds (QCB’s; and,
    • Non-QCB’s

Of those types of consideration, cash consideration is generally taxable to CGT immediately. In comparison, loan notes and shares are taxable when they are realised, at a later point. Therefore, the type of consideration used will have a significant impact on the point when CGT is payable.

1.1 Interaction with Entrepreneurs Relief (ER)

ER reduces the rate of capital gains tax from 20% to 10%. The rules are detailed but for the immediate purposes an individual must  have own 5% of the ordinary share capital ( giving him 5% of the voting rights and economic ownership)for a minimum of two years. Where the consideration for the shares being disposed of is partly in shares in acquiring co or more typically loan notes  either  QCBs or non – QCBs the issue becomes the availability of ER when the shares or QCB’s are ultimately  redeemed ( or the shares sold ).


QCB’s are exempt from CGT and in general l terms where  QCBs are taken in exchange for the disposal shares the gain on those shares is deferred  into the  QCB and does not crystalise until they are redeemed , at this stage the vendor will have lost entitlement to ER. However, the vendor can disapply the normal provisions  and treat the  original shares as disposed of; the risk here is  that  if the  QCB loose value  there is no tax relief for the loss or adjustment to the initial tax computation.

By comparison non QCBs are a security into which the gain on the original shares is  rolled over and deferred so that it only crystalise when the non QCB is redeemed. A gain so deferred is reduced or eliminated if the non QCB goes bad.  Again, an election can be made to crystalise the gain in the year of exchange.  ER may be available on the later redemption of the non QCB if ordinary shares are held which qualify for ER in their own right.

1.2 Stamp Duty

Stamp duty is payable on the value of the consideration, whether paid in cash, or non-cash consideration. If there is no marketable value of the non-cash consideration, stamp duty is payable on the ‘amount due’ under the agreement.

  1. Payment of Consideration

2.1 Capital Gains Tax

Broadly, there are two different groups that dictate a difference in tax treatment in relation to deferred consideration, these are:

  • Contingent and ascertainable value at the point of completion; or,
  • Contingent and unascertainable value at the point of completion.

2.1.1 Contingent and ascertainable

Where assets are purchased for contingent and ascertainable consideration, whether paid immediately or at a later date, the seller will be accountable for CGT in full on the whole of the taxable consideration. This may occur where a payment is made in instalments. A discount is not provided where consideration payments are deferred. From a cash flow perspective, this may cause a significant problem for the seller.

Where consideration is payable over 18 months, the seller may request that HMRC consider payment of tax in instalments. However, this is limited to a maximum of 8 years.

2.1.2 Contingent and unascertainable

Difficulty arises where consideration in whole or in part is unascertainable. This may occur where, for example, the purchase price includes a percentage of future profits, often referred to as an ‘earn out’.

At the point of completion, where all or part of the consideration is unascertainable, the seller will be deemed to make 2 disposals for CGT purposes.

(a) The first disposal includes the property (Target Co), plus the right to receive the deferred consideration (a chose in action); and,

(b) The second disposal occurs on the realisation of the deferred consideration.

However, this rule will not apply where the unascertainable consideration is only satisfied by a payment of shares or loan notes, the number of shares or loan notes is based on a future unascertainable event and the seller did not elect to disapply section 138A Taxation of Capital Gains Act 1992.

Notably, the substantial shareholding exemption does not apply (for companies) to relieve any gain where there is unascertainable consideration.

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