Illustration only. Sophie sells all her shares under a contract made on 1 July 2026 for £1,000,000. The buyer pays £900,000 at completion and £100,000 into escrow for 18 months to cover warranty claims. Her shares cost £100. 2026 to 2027 computation: proceeds £1,000,000 less cost £100 gives a gain of £999,900, even though £100,000 is still in escrow. In 2027 the buyer brings a warranty claim, settled at £60,000 paid out of the escrow. The remaining £40,000 is released to Sophie. Sophie claims under section 49(2). The proceeds are recomputed at £940,000 and the gain at £939,900. If the £60,000 had been taxed at 24%, she would recover £14,400. Interest on the escrow is taxed as savings income on whoever the escrow agreement makes entitled to it. If the shares qualified for Business Asset Disposal Relief, the rate and the repayment would differ, but the mechanism is the same.

Escrow and retentions on a share sale

When part of the price for your shares is paid into escrow or held back by the buyer, the whole price is normally taxed at the date of the sale, with no reduction for the wait or the risk that you never receive it. If some of it is later kept by the buyer, you claim to have the gain recomputed and the tax discharged or repaid: under section 49 of the Taxation of Chargeable Gains Act 1992 where it settles a warranty or indemnity claim, or under section 48 where it proves irrecoverable for another reason.

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What is the difference between an escrow and a retention?

Both are ways for a buyer to keep security for claims after completion. In an escrow, part of the price is paid at completion into an account held by a third party, often the parties’ solicitors, and released under an escrow agreement once a set date passes or claims are resolved. In a retention, the buyer simply holds back part of the price and pays it later if no claims arise. Either can secure warranty and indemnity claims, tax covenant claims or a later price adjustment.

For Capital Gains Tax the label is less important than the contract. HMRC’s Capital Gains Manual at CG14850 says the treatment of any deferred amount depends on its nature, and that you need to read the consideration clause of the actual contract to see what was agreed.

When is the escrowed amount taxed?

Under section 28, a disposal under an unconditional contract takes place when the contract is made, not at completion. Section 48(1) then requires the consideration to be brought into account without any discount for postponement and, in the first instance, without regard to any risk that part of it is irrecoverable or that the right to receive it is contingent.

An escrow or retention is usually a fixed sum, so it is what HMRC calls ascertainable. 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. CG14883 confirms that an amount which is ascertainable but contingent, such as £50,000 payable only if a condition is met, is treated in the same way. The result is that the amount in escrow is taxed in the tax year of the sale, alongside the cash paid at completion. That is very different from an unascertainable earn out, where only the value of the right to future payments is taxed at the outset.

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What happens if the buyer keeps some of the money?

There are three common outcomes, and each is dealt with differently.

The escrow pays a warranty or indemnity claim

Section 49(1)(c) says that no allowance is made at first for a contingent liability in respect of a warranty or representation given on a sale of property other than real property, which includes a sale of shares. Section 49(2) then allows an adjustment, on a claim, if the liability becomes enforceable and is enforced. CG14805 explains that you recompute the gain as if the consideration had been reduced by the payment. CG13010 confirms that where the seller makes a payment under a warranty or indemnity, the disposal consideration is adjusted under section 49, whatever the treatment in the hands of the person who receives it. Where money in escrow that belongs to the seller is used to settle the claim, it is in substance a payment by the seller, so the same adjustment should follow. Our guide to warranties and indemnities on a company sale covers how those claims arise.

The retention is never paid

If the buyer does not pay a sum that is due, for example because it becomes insolvent, section 48(1) allows a claim once that part of the consideration proves irrecoverable. CG14930 limits this to consideration actually due under the contract that is not received. A fall in the value of shares or loan notes received, or in a foreign currency, is not irrecoverable consideration.

The price is adjusted under a formula

Some agreements fix the final price by reference to completion accounts, for example adding or deducting £1 for every £1 by which net assets differ from a target. CG14815 says that in that situation the purchaser has no claim for damages, because the contract itself resolves the point, so section 49(1)(c) does not apply. Instead, the consideration is the adjusted price. Where the adjustment depends only on the position at completion, the amount was ascertainable by making up an account, so the corrected figure belongs in the original computation and an earlier return may need amending.

How and when do you make the claim?

CG14933 says a claim under section 48 identifies the disposal, the event that made the consideration irrecoverable, the amount, and the adjustment needed. The four year time limit runs from the time the consideration became irrecoverable; HMRC’s example is a purchaser’s liquidator reporting that unsecured creditors will receive nothing. For warranty payments, CG14805 says the four year time limit in section 43 of the Taxes Management Act 1970 runs from when all the conditions for the claim are met. In its example, a warranty dispute was settled several years after the sale, and the clock started on the settlement date.

Who pays tax on interest earned in the escrow account?

Interest is income, not part of the price. HMRC’s Savings and Investment Manual at SAIM2400 says the person liable is the person receiving or entitled to the interest, normally the beneficial owner of the account. It also says a person can be taxable even if they cannot withdraw the money, citing Dunmore v McGowan and the tribunal decision in Coxon, which concerned interest on an escrow account. Check what the escrow agreement says about who is entitled to the interest, because that decides whether it goes on the seller’s or the buyer’s return.

Can the tax be paid when the money is released?

Usually not. Section 280 lets a seller pay tax by instalments only where the consideration is payable in instalments that begin no earlier than the disposal, run for more than 18 months and continue beyond the normal due date (CG14910). A retention released in one sum within 18 months does not meet those conditions. CG15020 adds that where market value is substituted for the actual price, for example on a sale to a connected person under section 17 or 18, neither the instalment rule nor the irrecoverable consideration relief applies. The seller therefore needs to fund the tax on the escrowed amount from the cash received at completion. For a sale in 2026 to 2027, the normal due date is 31 January 2028.

How might this work?

Illustration only. Sophie sells all her shares under a contract made on 1 July 2026 for £1,000,000. The buyer pays £900,000 at completion and £100,000 into escrow for 18 months to cover warranty claims. Her shares cost £100.

2026 to 2027 computation: proceeds £1,000,000 less cost £100 gives a gain of £999,900, even though £100,000 is still in escrow.
In 2027 the buyer brings a warranty claim, settled at £60,000 paid out of the escrow. The remaining £40,000 is released to Sophie.
Sophie claims under section 49(2). The proceeds are recomputed at £940,000 and the gain at £939,900. If the £60,000 had been taxed at 24%, she would recover £14,400.
Interest on the escrow is taxed as savings income on whoever the escrow agreement makes entitled to it.

If the shares qualified for Business Asset Disposal Relief, the rate and the repayment would differ, but the mechanism is the same.

What mistakes come up?

Leaving the escrowed amount out of the gain until it is released.
Treating the release as a new disposal or as income in the year it is received.
Reducing the proceeds at the outset for a possible warranty claim instead of waiting for section 49(2).
Missing the four year time limit because the claim was not made when the escrow was finally settled.
Assuming interest on the escrow belongs to the seller without reading the agreement.

The gain and any later adjustment are reported on the capital gains pages of the tax return. For the wider choice between selling shares and selling assets, see selling a company.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.