Conditional Contracts for CGT Planning

Conditional contracts for CGT planning provide a valuable opportunity for sellers to commit to a future sale date without triggering an immediate capital gains tax (CGT) charge. This legal and tax-efficient mechanism allows the commercial terms of a sale to be secured now while deferring the CGT event to a more favourable time.

Why Conditional Contracts Are Vital in CGT Planning

Capital gains tax planning often hinges on timing. Business owners, particularly those selling shares or assets, may want to secure a deal today but delay the actual disposal until a new tax year, once a relief condition is met, or to benefit from a lower CGT rate. Conditional contracts make this possible, giving both commercial security and tax flexibility.

This strategy is especially useful when the seller requires additional time to qualify for Business Asset Disposal Relief (BADR), complete the minimum ownership periods, or navigate regulatory or shareholder approvals.

The Legal Framework: TCGA 1992, Section 28

The law governing the timing of CGT disposals under contracts is set out in Section 28 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).

It defines two types of contracts:

• Unconditional contracts: Where the agreement is legally binding at the time of signing, the CGT disposal is treated as occurring on that date—even if actual completion happens later.
• Conditional contracts: Where the contract includes a genuine condition that must be met before it becomes legally binding, the CGT disposal is treated as occurring only when the condition is satisfied.

This distinction is critical for timing the tax point of a disposal. The conditional contract allows flexibility in aligning the disposal date with optimal tax planning outcomes.

What Makes a Contract “Conditional”?

For CGT purposes, a contract is considered conditional if it includes a condition precedent—a clause that must be satisfied before the contract becomes legally enforceable. HMRC’s guidance in the Capital Gains Manual (CG14261) clarifies that this is a matter of contract law, not just tax planning.

Examples of genuine condition precedents include:

• Clearance from the Financial Conduct Authority (FCA)
• Shareholder or board approval
• Planning permission for property transactions
• Completion of a minimum ownership period for BADR

A contract with such a clause is not legally binding until the condition is met, and therefore, CGT is not triggered until that point.

Real-World Example

A business owner selling their company shares can include a clause in the sale agreement that makes the deal conditional on completing the two-year holding period for BADR. This allows the parties to agree on terms now while deferring the CGT event until the seller qualifies for the relief. This strategy can save significant amounts in CGT and provide tax protection for the seller.

The Risk of Artificial Delays

HMRC is alert to the misuse of conditional clauses that are inserted purely to manipulate the CGT date. The condition must be commercially valid and legally necessary. A vague or fabricated clause that merely delays execution without altering the legal enforceability of the contract may not qualify, and HMRC could treat the disposal as having occurred when the contract was signed.

To ensure compliance, businesses must:

• Use clear legal language to show that the contract is not binding until the condition is met
• Ensure the condition is essential and not under the unilateral control of either party
• Document the rationale behind the condition, particularly where regulatory or relief-related justifications apply

How Conditional Contracts Are Used in Practice

Conditional contracts are widely used in transactions involving the sale of shares, management buyouts, commercial property deals, and asset transfers. They are especially relevant when:

• A tax relief condition (like BADR or rollover relief) will be satisfied at a future date
• Parties require regulatory or shareholder approval before committing
• Buyers want to secure terms but defer liability or risk
• Sellers need more time for succession, finance, or retirement planning

These contracts offer dual benefits: commercial certainty for both parties and tax efficiency for the seller. Conditional contracts for CGT planning are essential for business owners, as they provide flexibility in timing taxable disposals and optimise available reliefs. They help in planning exits, qualifying for CGT reliefs, and negotiating across tax years, balancing commercial needs with HMRC compliance.