When you sell your company for loan notes, the CGT result depends on whether the notes are qualifying corporate bonds (QCBs). With QCBs your gain is calculated at the sale and frozen until the notes are repaid, and it stays taxable even if they are never paid in full. With non QCBs the shares and notes are treated as one asset and the gain is only worked out on repayment. Either way, Business Asset Disposal Relief usually needs an election to tax the gain at the time of the sale.

Why does the type of loan note make such a difference?

Where a buyer issues loan notes in exchange for your shares, section 135 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) can treat the exchange as a reorganisation, provided the buyer will hold more than 25% of the ordinary share capital, or makes a general offer that would give it control, or will hold the greater part of the voting power. HMRC’s Capital Gains Manual at CG53709 confirms that loan stock counts as debentures for this purpose.

What happens next depends on the notes. If they are QCBs, section 116 replaces the normal reorganisation treatment. If they are not, the normal section 127 rule applies. The two routes give different answers on when tax is paid, what rate applies, and what happens if the buyer fails to pay. The wider mechanics of exchanging shares are covered in share for share exchanges, and staged cash payments in earn outs and deferred consideration.

What makes a loan note a QCB or a non QCB?

Section 117 sets the test. Among other conditions, the debt must at all times represent a normal commercial loan (CG53705), and it must be expressed in sterling with no provision for conversion into, or redemption in, any other currency (CG53706). A note that carries a right to convert into shares fails the normal commercial loan test. CG53705 also explains, following Weston v Garnett, that the test looks at the underlying debt, so a right to convert into a second series of notes that are themselves convertible into shares is enough to stop the first notes being QCBs.

This means the status of a note is a drafting choice. A right to redeem in another currency can take a note outside the QCB definition, but CG53706 explains that a provision for redemption in another currency at the exchange rate prevailing at redemption can be ignored, so not every currency clause works. The wording needs care, and buyer and seller should agree the intended status before signing.

How are QCB loan notes taxed?

Under section 116(10), the exchange is not treated as a disposal. Instead, the gain that would have arisen if you had sold your shares for their market value at that moment is calculated and frozen. It comes into charge when you dispose of the notes, which includes redemption. Any further gain on the notes themselves is exempt under section 115 (CG53711).

Three features stand out. The frozen gain is fixed at the exchange, so it is still charged in full if the notes are later repaid at less than face value, and a loss on a QCB is not an allowable loss because of sections 115 and 16(2). The frozen gain is lost if you die holding the notes (CG53725). And a transfer of the notes to your spouse or civil partner under section 58 does not trigger it; your spouse takes over the frozen gain instead (CG53719). The detail is in gilts and qualifying corporate bonds.

How are non QCB loan notes taxed?

Section 135 applies sections 127 to 131 as if the two companies were one and the exchange were a reorganisation. The notes are treated as the same asset as your shares, acquired when and for what you paid for the shares (CG53709). Nothing is taxed on the exchange. When the notes are repaid, the gain is the redemption proceeds less your original share cost.

A security that is not a QCB is treated like any other asset (CG53702), so if the buyer defaults you are only taxed on what you actually receive, and a shortfall below your cost can be an allowable loss.

How does Business Asset Disposal Relief fit in?

The relief taxes qualifying gains at 18% for disposals from 6 April 2026 (14% for 2025 to 2026), up to a lifetime total of £1 million. The difficulty with loan notes is timing. For shares, the conditions include being an officer or employee of a trading company that has been your personal company, broadly with at least 5% of the shares and votes, for 2 years. These are usually met at the sale, but not when the notes are repaid years later.

Election for QCBs: section 169R

If you make an election under section 169R, you can claim the relief as if the exchange were a disposal of your shares, and section 116(10) does not apply. The gain is taxed in the year of the sale at the relief rate. HMRC’s CG64161 notes that without an election it would be unusual for the conditions to be met when the frozen gain later comes into charge.

Election for non QCBs: section 169Q

Section 169Q works the same way for an exchange within sections 127 and 135. If you elect, you can claim the relief as if the exchange involved a disposal of the original shares, and section 127 does not apply (CG64155).

Both elections must be made by the first anniversary of the 31 January following the tax year of the exchange, so for a sale in 2026 to 2027 the deadline is 31 January 2029. HMRC states that a partial election covering only some of the shares is not possible.

How do the options compare?

Position When gain is taxed Relief rate available If the buyer defaults
QCB, no election On repayment, at frozen amount Unlikely Frozen gain still taxed, no loss
QCB, section 169R election Year of sale Yes, if conditions met Tax already paid, no loss on the notes
Non QCB, no election On repayment, on actual proceeds Unlikely Taxed only on what is received
Non QCB, section 169Q election Year of sale Yes, if conditions met Tax already paid, loss on notes may be allowable

How does this work in practice?

Illustration only. Dana has run her trading company for ten years and owns 40% of it. Her shares cost £10,000. In June 2026 she sells them for £500,000 of loan notes, repayable in 2029. Assume she qualifies for the relief, has her full £1 million lifetime limit and is a higher rate taxpayer.

  • QCB, no election: a frozen gain of £490,000 comes into charge in 2029. At 2026 to 2027 rates, that would be 24%, or £117,600.
  • QCB or non QCB with an election: the £490,000 gain is taxed in 2026 to 2027 at 18%, giving £88,200, before she has received any cash.
  • Non QCB, no election: nothing is taxed until 2029, when the gain is the proceeds less £10,000, at the rates then in force.

If the buyer then repays only £200,000, a QCB holder is still taxed on £490,000, whether in 2029 or already in the year of sale. A non QCB holder without an election is taxed on a gain of £190,000. A non QCB holder who elected has paid tax on £490,000 but may have a capital loss on the notes to use against other gains.

What mistakes come up most often?

  • Accepting the buyer’s standard loan note wording without checking whether the notes are QCBs.
  • Assuming the relief will be available when the notes are repaid, and missing the election deadline.
  • Electing without planning for a tax bill that falls due before any cash is received.
  • Overlooking the default risk on QCBs, where the frozen gain is taxed whatever is repaid.
  • Not seeking advance clearance. Section 138 lets either company apply in writing before the exchange for confirmation that the section 137 anti avoidance rule will not apply; HMRC can ask for further particulars within 30 days.
  • Forgetting that giving QCBs away, other than to a spouse or civil partner, can bring the frozen gain into charge (CG53722).

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.