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When Selling a Business Isn’t Paid in Full Upfront
When an individual sells shares in their own company, any profit made is usually subject to Capital Gains Tax (CGT). But not every sale is paid for immediately in cash. Many sales include non-cash or delayed payments—known as deferred consideration—which can create complexity when working out the tax.
Understanding how to calculate CGT when consideration is deferred is critical to avoid unexpected tax liabilities or missed reliefs. This blog explains how deferred payments are taxed, the difference between ascertainable and unascertainable consideration, and what to do if you never receive the money you were promised.
What Counts as “Consideration” in a Sale?
When working out how much gain is made on the sale of a business, the full value received must be included. This includes:
- Immediate cash payments
- Non-cash assets
- Any future payments agreed at the time of sale
If the deal isn’t made at arm’s length (for example, if it’s with a friend or family member and undervalued), the transaction must be treated as if it was made at open market value. The seller is taxed as if they received the full market price, not just what was actually paid.
Understanding Deferred Consideration
Deferred consideration simply means that part of the payment is delayed. This is often done to help the buyer with cash flow or to tie payment to the future performance of the business (such as reaching profit targets).
There are two types of deferred consideration:
1. Ascertainable Consideration: This is when the total amount to be paid is known or can be calculated when the sale takes place. Even if it’s not paid until years later, the seller is taxed on the full value in the year of sale.
2. Unascertainable Consideration: This is when future payments depend on unknown factors, such as how well the business performs in the next year. If the exact amount can’t be worked out at the point of sale, it’s classed as unascertainable. In this case, the seller is taxed not on the actual payment but on the estimated value of the right to receive the payment—this right is treated as an asset itself.
What Happens If Deferred Payments Are Never Received?
If the payment is never made, the tax rules treat the two types of consideration very differently.
For Ascertainable Consideration
If the seller ends up not receiving some or all of the agreed payment, they may be eligible to claim a reduction in the CGT originally paid. This involves proving that:
- The amount has become permanently irrecoverable
- The loss relates to the original taxable gain
- The correct claim is made within four years of the payment becoming unrecoverable
This offers some protection but still places a burden on the seller to take timely action.
For Unascertainable Consideration
If future payments don’t materialise and the right to receive them becomes worthless, the tax relief process will be different. Because the seller was taxed on the estimated value of the right, they can’t reduce the original gain directly.
Instead, they may be able to claim a capital loss on the asset (i.e., the right to receive payment) and, in certain cases, choose to apply that loss back to the original year of sale. This option has a strict deadline and cannot be reversed once elected.
When Does Capital Gains Tax Get Paid?
Regardless of when the money is actually received, the CGT liability arises in the tax year when the sale agreement is made. This can mean the seller pays tax years before receiving full payment. In some cases, if the deferred payments don’t come through, this can create real cash flow pressure.
That’s why it’s so important to understand whether the deferred amounts are considered ascertainable and to value them properly.
Key Points to Remember
- Deferred consideration must be included in your CGT calculation at the time of sale—no discounts allowed just because payment is delayed or uncertain.
- Unascertainable payments are treated as a right to future income, which is taxed differently and can’t be reversed under the same rules as ascertainable consideration.
- If you don’t get paid, there are reliefs available—but only if you act within the allowed timeframes and provide the necessary evidence.
- Losses on unascertainable rights can be offset against the original gain, but only by making a formal, irrevocable election.
Get It Right at the Start
Deferred payments are common in business sales, but they come with significant tax complexity. It’s vital to know how to treat the different types of consideration, how and when to include them in your CGT calculation, and what your options are if something goes wrong.
If you’re selling a business—or have already sold one and are unsure about your CGT position—now is the time to review your paperwork, confirm the tax treatment, and ensure you’re claiming everything you’re entitled to.
Need Expert Help Calculating Capital Gains Tax on a Business Sale?
At Tax Accountant, we specialise in helping business owners navigate tax on sales, including deferred consideration and complex CGT scenarios. From valuation to relief claims, we’ll guide you through it. Get in touch today for tailored advice and peace of mind.