Selling your business is a big decision—whether you’re planning for retirement or moving on to your next venture. But how you structure the sale can dramatically impact your tax bill.
Should you take cash upfront, opt for loan notes to spread payments, or go for an earn-out to maximise future gains? Each approach has different tax implications, and getting it wrong could cost you.
Let’s break it down so you can make the most tax-efficient choice.
Option 1: Full Cash Sale – Get Paid Now, Pay Tax Now
A full cash sale is the simplest and least risky approach. You receive the full amount at completion, and Capital Gains Tax (CGT) is due in the tax year of sale.
- Best for: Business owners who want a clean break and to minimise tax risk.
- Can you claim Business Asset Disposal Relief (BADR)? Yes, if you meet the criteria.
- CGT Rate: 10% (increasing to 14% in 2025/26 and 18% in 2026/27) on the first £1m of lifetime gains, then 24% on the rest (for higher and additional rate taxpayers).
Key consideration: You might have to pay CGT before receiving all the money. If the buyer pays in instalments, you still owe HMRC by 31 January after the sale tax year. However, you can request to spread CGT payments if the sale price is paid over at least 18 months.
Option 2: Loan Notes – Spread the Tax, But Lose BADR
Instead of taking all cash upfront, the buyer might offer loan notes (corporate bonds or unquoted shares) as part of the deal. This defers CGT until the loan notes are redeemed or sold.
- Best for: Sellers who want to spread CGT liability over time.
- BADR is usually lost because loan notes don’t count as chargeable assets for CGT.
- CGT is only payable when the loan notes are cashed in—but at whatever the tax rate is at that time.
Key consideration: If CGT rates increase in the future, you might end up paying more tax than if you’d taken cash upfront.
Can you still claim BADR? You can elect to trigger CGT immediately (instead of deferring), allowing you to claim BADR—but you must have enough cash from the deal to cover CGT on both the cash and loan note portion.
Option 3: Earn-Outs – Higher Potential Gains, Higher Risk
With an earn-out, part of the sale price depends on the future performance of the business. If the company does well, you get more money—but if it underperforms, you could get less.
- Best for: Sellers who believe the business will grow after they leave and want to maximise their sale price.
- BADR may still apply—but only to the portion of the gain that qualifies.
- Future earn-out payments could be taxed at higher CGT rates, and BADR won’t apply to additional cash received later.
Key consideration: If you take shares instead of cash, you might be able to roll over the gain, deferring CGT until you sell those shares.
Practical Tip: Double Your BADR Allowance
If you’re married or in a civil partnership, consider transferring shares to your spouse before selling. This can double your £1 million BADR limit, provided they meet the qualifying conditions.
Which Option Is Right for You?
- Want a clean break with minimal tax risk? Full cash sale (BADR applies if eligible).
- Want to spread CGT payments over time? Loan notes (but watch out for BADR restrictions).
- Willing to bet on future growth? Earn-out (higher potential, but riskier).
Selling your business is a major financial decision—and choosing the right payment structure can save you thousands in tax.
Thinking of selling? Talk to Jon and the team before you sign anything! We’ll help you structure the deal in the most tax-efficient way.
Call us today or drop us a message—we’re here to help!
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Any questions?
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