One of the most common questions that comes up in business sale conversations is straightforward:
What tax am I going to pay when I sell?
More specifically, sellers are often concerned about deferred consideration. They may be happy to accept payment over time, but then the concern becomes:
Am I going to be taxed on the full sale price on day one, even if I have not received the money yet?
There are two key structures that are typically relevant in these conversations:
Instalment Relief
Qualified Corporate Bonds, commonly structured via loan notes
Understanding the principles behind these makes you far more credible in M&A discussions. The execution still needs proper tax and legal advice, but knowing the landscape matters.
1. Instalment Relief: Paying CGT by Instalments
Instalment Relief allows Capital Gains Tax to be paid by instalments linked to the contractual instalments of consideration, rather than all at once at completion.
In a standard share sale, the disposal date is the date of contract. Without relief, CGT is calculated on the full consideration at that point, even if part of it is payable later. Instalment Relief can allow the tax liability to be paid in stages, broadly in line with the agreed instalment schedule.
This is typically relevant where consideration is payable over a period extending beyond 18 months.
When does it apply?
Instalment Relief works best where:
The total price is fixed and ascertainable at the outset
The payment schedule is clearly defined
The amounts and dates are written into the Share Purchase Agreement
For example:
£500,000 on completion
£500,000 per year for five years
All dates and amounts contractually fixed
The key is certainty. HMRC are looking for a documented schedule of fixed instalments under the contract.
The seller must apply to HMRC for permission to pay the CGT by instalments. In practice, straightforward, clearly documented arrangements are commonly accepted, but this is not automatic and should be handled properly by the seller’s adviser.
Important limitation: contingent and performance-based consideration
Instalment Relief is designed for fixed, ascertainable instalments.
Performance-contingent or unascertainable consideration, typical earn-outs, are treated differently under the CGT rules and often will not qualify for instalment relief in the same way.
It is also important to be precise here: earn-outs are not automatically “income”. The tax treatment depends on how the deal is structured. Where the seller is receiving deferred share consideration, CGT treatment may still apply, subject to specific rules for unascertainable consideration. However, if payments are linked to employment, consultancy, or performance in a way that recharacterises them, income tax and National Insurance can arise.
The key message is that you cannot assume instalment relief will apply to performance-based elements. Those need careful structuring.
Practical point
The relief is applied for by the seller. The buyer’s role is simply to ensure that the SPA clearly sets out the instalment schedule. Poor drafting creates unnecessary risk.
2. Qualified Corporate Bonds (QCBs): A More Formal Deferral Structure
The second structure commonly used in deferred consideration deals is a Qualified Corporate Bond, typically implemented via properly structured loan notes.
Instead of relying on an application to HMRC to pay CGT by instalments, the consideration is legally converted into a corporate bond instrument that meets the statutory definition of a QCB.
This does not usually require a separate “permission” process with HMRC in the same way as Instalment Relief. The tax treatment follows from the statutory classification of the instrument, assuming it is structured correctly.
The broad effect is that the gain attributable to the QCB is effectively deferred and crystallises when the bond is redeemed or disposed of, rather than at completion.
Interest paid on the bond is taxed as income in the usual way, and capital repayments trigger the relevant CGT charge at that point.
The Business Asset Disposal Relief (BADR) trade-off
This is where care is required.
Since legislative changes made in 2010, using loan notes or QCB deferral can prevent Business Asset Disposal Relief from applying to the deferred gain. In other words, the seller may lose access to the lower BADR rate on that element of the consideration.
Sellers need to model this trade-off properly.
As of current rules:
For disposals on or after 30 October 2024, the main CGT rates for most non-residential assets are 18 percent and 24 percent.
The BADR rate is 14 percent from 6 April 2025 and increases to 18 percent from 6 April 2026.
If BADR is lost on the deferred gain, the seller may be paying at the higher CGT rates instead. However, in some deals, for example where BADR would not have applied anyway, this is less relevant.
It is not accurate to say QCBs “usually remove BADR”. The correct position is that deferred gains rolled into QCBs may not qualify for BADR under the post-2010 rules. This must be analysed case by case.
Commercial considerations
Properly structured loan notes can:
Provide lender comfort where deferred consideration is significant
Potentially be secured or documented more formally
Include interest, which is generally deductible for the paying company
Interest planning can also be used to adjust the commercial balance of the deal, but this should always be done within a defensible commercial range.
What Not To Do: Artificial Share Staggering
Some structures attempt to split a transaction into multiple staged share disposals to manage tax timing.
In practice, this introduces significant legal and tax risk and may be challenged if it appears that the overall transaction was agreed upfront but artificially fragmented.
Given that Instalment Relief and properly structured loan notes exist, there is rarely a compelling reason to rely on aggressive staging.
The Strategic Takeaway
When sellers ask how they can defer tax on deferred consideration, the real answer is usually one of two routes:
Instalment Relief, where CGT is paid by instalments linked to fixed contractual payments
Qualified Corporate Bonds or properly structured loan notes, where the gain on the deferred element crystallises on redemption
Both routes have technical conditions and trade-offs. Neither should be implemented without specialist advice.
But if you understand the mechanics and the limitations, you move the conversation from fear to structure, which is often the difference between a stalled deal and a completed one.
Please seek professional advice and guidance when considering implementing the content of this blog and always advise the seller to seek independent advice.
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