Beware the earn-out tax trap

Business owners rushing to sell their concerns before the expiry of business asset taper relief may still be caught by the changes if they plan to use an earn-out agreement, according to Chris Riley, a tax manager with accountancy firm CLB Littlejohn Frazer.

‘Businesses are frequently sold using an earn-out agreement, and payments under such arrangements will probably be made past the new CGT rate deadline. That means sellers may still therefore be liable for the new 18 per cent rate,’ explains Riley.

Riley says that businesses looking to sell before 5 April can still benefit from the ten per cent tax rate by settling entirely in cash or ensuring that the earn-out mechanism allows proceeds to be settled in cash (as opposed to a deferred sale of a portion of the business). But he adds: ‘This creates potential cashflow issues for the vendor, as the tax liability will crystallise immediately, which will need to be balanced against the potential overall tax saving.’

Lindsay Pentelow, tax partner at advisory firm Mazars, agrees. She counsels: ‘If you are in the process of a sale, or have already sold with deferred consideration, look to close by April. But by chasing a quick sale for tax reasons alone, you may lose more value than you save.’

Pentelow adds that businesses should wait to close any sale until final details of the proposed changes are known, which may be before Christmas.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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