skip to navigationskip to main content

Earn-out Payments on Business Sales

Newsletter issue - November 2013

When you sell a business, you may receive some of the consideration up front and another payment later if the business meets certain targets, that later payment is called an 'earn-out'.

How this earn-out is taxed can be tricky to work out, as it depends on a number of factors. For example: is the earn-out to be paid in cash or as shares or bonds, or is there a cash alternative to the offer of shares/bonds? Can the value of the earn-out be determined at the time the business was sold, or not until some later event has occurred?

Determining or 'ascertaining' the value of the earn-out is crucial for your capital gains tax computation.

If the earn-out can be ascertained (even within a broad range of values) at the time the business is sold, both the up-front and earn-out payments must be taxed as if they were both received together at the business sale date.

This can work in your favour. If the business sale qualifies for entrepreneurs' relief, the up-front payment and earn-out which is taxed with it will also qualify for entrepreneurs' relief. This reduces the tax payable on the earn-out to 10%. However, if the earn-out can't be ascertained until it is received, it won't qualify for entrepreneurs' relief, so will be taxed at 28% (or your highest rate for CGT).

We should discuss all this before you finalise the sale of your business. There are numerous ways of structuring the payment for a business and they all have different tax implications.

Working with you

Whether you're starting from scratch or have been in business for years you'll benefit from working with GWAS Limited advice on how to take you to the next level.

fixed-quote-man.jpg

About us

We work closely with our clients and act for a broad range of business....

business-advice-couple.jpg

Get in touch

Simple way to contact us. Just fill in a simple form.

free-consultation-couple.jpg

Our services

Find out details about what we can do
for you.