How deferred sale proceeds are taxed depends on whether the amount was ascertainable when the sale took place. A fixed or calculable sum is taxed in full at the date of sale under section 48 of the Taxation of Chargeable Gains Act 1992, with relief later if it is never paid. An unascertainable earn out, such as a share of future profits, is taxed in two stages under the Marren v Ingles approach: the value of the right is part of the original sale proceeds, and each later payment is a disposal of that right.

What is the first question to ask about deferred consideration?

HMRC’s Capital Gains Manual at CG14850 starts with the contract. The consideration clause decides the treatment, and the questions are whether the future payments were ascertainable at the date of disposal, whether the asset was property, whether the payments are tied to an employment contract, whether they are income or capital, and whether they are in shares or loan notes.

CG14881 says future amounts are ascertainable if at the date of disposal they are known, can be calculated, or can be found by making up an account where all the events that fix the amount have already happened. Its examples include £200,000 payable in four annual instalments, and a sum equal to half the profits for the year ending on the date of sale. CG14940 says consideration is unascertainable if the events that establish the amount happen after the disposal, such as a percentage of profits over the next three years. A cap on the total does not make it ascertainable at the cap.

How is ascertainable deferred consideration taxed?

Section 48(1) requires the whole consideration to be brought in at the time of disposal with no discount for waiting, no allowance for the risk of non payment and no regard to any contingency. CG14881 confirms there are no further tax consequences when the instalments arrive. Marson v Marriage held that section 48 applies to a contingent sum if its amount is ascertainable (CG14990).

The safety valve is the second half of section 48(1): if part of the consideration later proves irrecoverable, a claim can be made for the computation to be adjusted and tax discharged or repaid. CG14930 limits this to amounts actually due under the contract that are not paid. A fall in the value of foreign currency or of non cash consideration does not count.

Can the tax be paid in instalments?

Section 280 allows the seller to pay the tax by instalments where the consideration is payable in instalments over a period of more than 18 months beginning no earlier than the disposal. The tax instalments can run for up to eight years but must end by the date of the last instalment of price. CG14910 says HMRC normally expects each tax instalment to be 50% of each instalment of price until the liability is cleared, payable on the later of the normal due date and the date the price instalment is due.

Section 280 does not help where the deferred amount is unascertainable, because the seller has received a right rather than instalments (CG14940). CG15020 adds that it does not apply where the seller is paid in full and lends the money back to the buyer, or where market value has been substituted for the price.

How is an unascertainable earn out taxed?

CG14990 summarises Marren v Ingles. The right to receive future unascertainable payments is a chose in action, which is a chargeable asset. Its value at the date of sale is added to the cash received to give the proceeds of the original disposal (CG14950). When payments are later received, they are capital sums derived from the right under section 22, so each one is a disposal or part disposal of the right. CG14970 confirms the base cost of the right is the value used in the original computation, and a series of payments is a series of part disposals needing a valuation of the remaining right each time.

Valuing the right is often the hardest step. HMRC refers valuations of rights over non property assets to its Shares and Assets Valuation team (CG14950), so a reasoned valuation at the date of sale is worth having on file.

What reliefs and rates apply to the later payments?

CG14970 is clear that the disposal of the right does not get any relief given on the original disposal. Its example is an individual who sells a business with Business Asset Disposal Relief: the later earn out gain does not qualify, and is taxed at the main rates, which for gains from 6 April 2026 are 18% within the basic rate band and 24% above it.

If the payments come in below the value placed on the right, a capital loss arises. Section 279A lets an individual elect to treat that loss as accruing in an earlier year in which a gain arose on the original disposal, so it is set against the gain that created the right. Section 279D requires the election by the first anniversary of 31 January following the tax year of the loss, and it is irrevocable. Companies cannot use this election (CG15080).

What changes when the earn out is satisfied in shares?

Where shares in a company are sold and the buyer will satisfy the earn out only by issuing its own shares or loan notes, section 138A treats the earn out right as a security of the buyer. CG58000 explains that this lets the share exchange rules apply, so there is no disposal of the old shares for the earn out element and the new shares inherit their cost. The conditions include that the right cannot be discharged other than by an issue of shares or debentures and that the amount is unascertainable because it depends on future business.

For rights conferred from 10 April 2003 this is automatic, but a seller who is not a company can elect out by the first anniversary of 31 January following the tax year in which the right was conferred; the election is irrevocable (CG58020). A seller might elect out to crystallise a gain now, for example while Business Asset Disposal Relief conditions are met. Section 169Q offers another route: an election, made by the first anniversary of 31 January following the tax year of the reorganisation, to treat the exchange as a disposal so that Business Asset Disposal Relief can be claimed. See share for share exchanges.

When might an earn out be taxed as income?

CG14871 warns that deferred consideration may be employment income where the seller only receives it by continuing to work for the company as a director or employee; see employment related securities. CG14873 distinguishes a capital sum measured by profits from a stream of income payments, such as a percentage of turnover with no obligation to pay a capital sum, which is taxed as income. Where the asset sold is property or shares deriving value from property, CG14870 points to the anti avoidance rule in section 752 of the Income Tax Act 2007.

How does a simple earn out work through?

Illustration only. Tom sells his sole trade in 2026 to 2027 for £400,000 cash plus 20% of the buyer’s profits from the business over the following three years. The right is valued at £60,000 at the date of sale. His goodwill has no base cost.

Event Computation
Sale in 2026 to 2027 Proceeds £400,000 cash plus £60,000 right; gain £460,000, potentially qualifying for Business Asset Disposal Relief
Single payment of £90,000 three years later Disposal of the right: £90,000 less £60,000 cost gives a £30,000 gain at main rates, no relief
If only £20,000 had been paid Loss of £40,000 on the right; section 279A election can carry it back to 2026 to 2027

What mistakes come up?

  • Treating a capped earn out as ascertainable at the cap.
  • Asking for section 280 instalments on an unascertainable earn out.
  • Claiming Business Asset Disposal Relief on later earn out receipts; see Business Asset Disposal Relief.
  • Missing the section 279A or section 138A election deadlines.
  • Ignoring employment conditions in the sale agreement.
  • Forgetting to split the overall price between assets first; see selling a sole trade or partnership.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.