Funding the purchase of an accountancy practice

Q: What are the main ways to fund a practice purchase?

Buyer's own funds, from cash reserves of an existing firm or personal savings. Bank lending, usually a term loan repaid over several years, sometimes with an overdraft or revolving facility for the extra working capital. Vendor deferred consideration, where the seller agrees to receive part of the price in instalments after completion. Retention linked payments, where later instalments rise or fall with the fees retained, so the acquired clients partly pay for themselves. ICAEW's helpsheet on buying and selling fees says the payment period can range from everything paid immediately to instalments over a number of years, that payment over a period can be considered a loan on which interest may be expected or reflected in a higher price, and that the parties' personal circumstances and tax positions can influence the arrangements. Valuation and due diligence are covered in buying an accountancy practice.

Q: Is interest on acquisition borrowing tax deductible?

Sole practitioner. Section 29 of the Income Tax (Trading and Other Income) Act 2005 makes interest a revenue item for trade profits whatever the nature of the loan, and BIM45700 confirms interest is allowable where the borrowing is used for business expenditure or acquiring assets used in the business, subject to the wholly and exclusively test. Company buyer. BIM45650 notes that for corporation tax interest is dealt with under the separate loan relationships rules rather than the income tax rules. See interest on loans to your company for the shareholder side. Individuals borrowing to invest. HS340 explains that an individual can claim relief on a loan used to buy into or fund a trading or professional partnership, or to buy shares in or lend to a close company where they hold more than 5% or hold shares and work for the greater part of their time in its management. Overdraft and credit card interest does not qualify.

Q: How might a deal be structured in numbers?

Illustration only. A buyer agrees to pay £400,000 for a block of fees billing £400,000 a year, with the final price adjusted pro rata to fees billed to transferred clients in the first twelve months. SourceWhen paidAmount Buyer's cashCompletion£60,000 Bank term loan over five yearsCompletion£100,000 Deferred, adjusted for retentionMonths 12 and 24£240,000 If first year fees from transferred clients are £360,000, the price falls to £360,000 and the deferred balance to £200,000. The bank has £100,000 at risk against a fee base that has held up at 90%, while the seller carries the first £40,000 of lost fees. The bank will test whether profit from the acquired fees covers the roughly £20,000 a year of capital repayments plus interest and the deferred instalments.

Most accountancy practice purchases are funded by a mix of the buyer’s own cash, a bank term loan and deferred payments to the seller, with part of the price often tied to the fees that clients actually stay for. Lenders focus on the quality of the recurring fee base, the buyer’s ability to service the debt from the acquired fees, and how much of the risk the seller is sharing. The structure also decides when the seller pays capital gains tax and whether the buyer gets relief for interest.

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What are the main ways to fund a practice purchase?

Buyer’s own funds, from cash reserves of an existing firm or personal savings.
Bank lending, usually a term loan repaid over several years, sometimes with an overdraft or revolving facility for the extra working capital.
Vendor deferred consideration, where the seller agrees to receive part of the price in instalments after completion.
Retention linked payments, where later instalments rise or fall with the fees retained, so the acquired clients partly pay for themselves.

ICAEW’s helpsheet on buying and selling fees says the payment period can range from everything paid immediately to instalments over a number of years, that payment over a period can be considered a loan on which interest may be expected or reflected in a higher price, and that the parties’ personal circumstances and tax positions can influence the arrangements. Valuation and due diligence are covered in buying an accountancy practice.

How does vendor finance work in a practice sale?

When a seller accepts deferred payments, they are lending the buyer part of the price. That has three consequences the agreement should deal with.

Interest or price. Following the ICAEW point above, either the deferred amount carries interest or the headline price is higher to reflect waiting. The parties should decide which, because the tax treatment of interest and capital differs for both sides.
Security. A seller may ask for a charge over the buyer’s company assets, a personal guarantee, or a right to take back the fees if instalments are missed. A bank lending at the same time will usually insist that the seller’s claims rank behind its own.
Default and set off. The agreement should say what happens if instalments are late, and whether the buyer can withhold payments because of warranty claims or lost clients.

Consultancy fees paid to the seller for help with the handover are a separate item. ICAEW notes the seller’s involvement may be paid as part of the price, a fixed sum or according to input. Paying it separately keeps the capital price and the income clear.

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How do payments linked to retained fees help fund the deal?

A retention or clawback clause sets the final price by reference to the fees the buyer actually bills to transferred clients over an agreed period, often the first year. ICAEW describes clawback as a reduction in the amount payable if clients are lost or fees are lower than expected, and says a maximum should be agreed. For funding, the point is that the later instalments are paid largely out of fees collected from those same clients, and fall if clients leave. The drafting points are in retention clauses on practice sales.

What do lenders look at?

Banks lending against a practice acquisition are lending against goodwill, which has little value if clients leave. They therefore look closely at:

Recurring fees: how much of the fee base is annual compliance work that repeats, and how much is one off.
Concentration: whether a few clients make up a large share of fees. See fee dependency on one client.
Cash conversion: work in progress and debtor days in both firms, because acquired fees take time to turn into cash. See practice KPIs and lock up.
Debt service: whether forecast profits from the combined firm comfortably cover loan repayments and interest after partners’ or directors’ drawings and tax.
The buyer: track record in integrating clients, regulatory standing and AML supervision, and staff capacity to do the extra work.
Deal terms: how much of the price is deferred and at risk for the seller, and whether the seller stays involved during the handover.
Security: debentures over company assets and personal guarantees from the owners are common for smaller firms.

How is borrowing secured and registered?

If the buyer is a company or LLP and grants a charge, it must be registered at Companies House. For companies, section 859A of the Companies Act 2006 allows 21 days beginning with the day after the charge is created to deliver the statement of particulars. A charge that is not registered in time is void against a liquidator, administrator and creditors. See registering a charge.

For a sole practitioner or partnership the security does not decide whether interest is deductible. HMRC’s Business Income Manual at BIM45685 says the security for borrowed funds does not determine their use, so a loan secured on the owner’s home but used to buy a practice is judged by that business use.

Is interest on acquisition borrowing tax deductible?

Sole practitioner. Section 29 of the Income Tax (Trading and Other Income) Act 2005 makes interest a revenue item for trade profits whatever the nature of the loan, and BIM45700 confirms interest is allowable where the borrowing is used for business expenditure or acquiring assets used in the business, subject to the wholly and exclusively test.
Company buyer. BIM45650 notes that for corporation tax interest is dealt with under the separate loan relationships rules rather than the income tax rules. See interest on loans to your company for the shareholder side.
Individuals borrowing to invest. HS340 explains that an individual can claim relief on a loan used to buy into or fund a trading or professional partnership, or to buy shares in or lend to a close company where they hold more than 5% or hold shares and work for the greater part of their time in its management. Overdraft and credit card interest does not qualify.

How does deferred consideration affect the seller’s tax?

The form of deferral changes when the seller is taxed, which often shapes what they will accept.

Fixed instalments. Section 48 of the Taxation of Chargeable Gains Act 1992 brings the full consideration into the gain at the date of disposal, with no discount for waiting, and allows a claim to adjust if part later proves irrecoverable. HMRC’s CG14881 confirms that where future payments are ascertainable the full amount is included at disposal.
Paying the tax in instalments. Under section 280, where consideration is payable by instalments over a period exceeding 18 months, the seller may opt to pay the tax by instalments over up to eight years, ending no later than the last instalment.
Retention linked amounts. CG14940 says consideration is unascertainable if the events fixing the amount happen after the disposal. The seller is treated as receiving a right to future payments, valued at the date of sale, and HMRC says instalment payment of tax and section 48 relief are not appropriate for that right.

CG14850 stresses that the contract terms decide the treatment, so the consideration clause should be drafted with the tax position in mind.

How might a deal be structured in numbers?

Illustration only. A buyer agrees to pay £400,000 for a block of fees billing £400,000 a year, with the final price adjusted pro rata to fees billed to transferred clients in the first twelve months.

Source	When paid	Amount
Buyer’s cash	Completion	£60,000
Bank term loan over five years	Completion	£100,000
Deferred, adjusted for retention	Months 12 and 24	£240,000

If first year fees from transferred clients are £360,000, the price falls to £360,000 and the deferred balance to £200,000. The bank has £100,000 at risk against a fee base that has held up at 90%, while the seller carries the first £40,000 of lost fees. The bank will test whether profit from the acquired fees covers the roughly £20,000 a year of capital repayments plus interest and the deferred instalments.

What mistakes do buyers make?

Borrowing for the price but forgetting the working capital needed while acquired work is billed and collected.
Agreeing deferred payments with no clear treatment of interest, set off or default.
Giving the seller security that conflicts with the bank’s.
Using an overdraft for a personal investment in a partnership, where relief is not available.
Missing the 21 day window to register a company charge.
Ignoring deal costs; see tax on deal costs.

Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

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Sources

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.