A seller in a management buyout is usually taxed on a disposal of shares to a new company formed by the managers, so the gain is normally within Capital Gains Tax, with Business Asset Disposal Relief at 18% for 2026 to 2027 on up to £1 million of lifetime gains if the conditions are met. The tax position turns on how the price is paid: cash, vendor loan notes, fixed deferred payments and earn outs are each taxed at different times, and a clearance application to HMRC is usually made before completion.

How is a typical management buyout structured?

In most buyouts the managers form a new holding company (Newco), which buys the trading company’s shares using bank borrowing, the managers’ own money and, very often, credit from the seller in the form of loan notes or deferred payments. For the seller this is a share sale for Capital Gains Tax. Under section 28 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) the disposal happens when the contract is made, or when any condition (such as bank funding) is satisfied.

Some smaller buyouts instead have the company buy back the seller’s shares, which has its own conditions (see company share buybacks) and its own clearance under section 1044 of the Corporation Tax Act 2010.

Will Business Asset Disposal Relief apply?

GOV.UK confirms that Business Asset Disposal Relief taxes qualifying gains at 18% for disposals from 6 April 2026 (14% for 2025 to 2026 and 10% before that), with a lifetime limit of £1 million of gains. For a share sale, throughout the 2 years up to the sale the seller must be an officer or employee of the company or a group company, the company must be a trading company or the holding company of a trading group, and it must be the seller’s personal company, which broadly means holding at least 5% of the shares and voting rights plus an entitlement to at least 5% of distributable profits and assets on a winding up, or of the sale proceeds.

Gains above the lifetime limit are taxed at the normal Capital Gains Tax rates, which GOV.UK gives as 18% within the basic rate band and 24% above it for 2026 to 2027, after the £3,000 annual exempt amount.

How are vendor loan notes taxed?

When Newco issues loan notes to the seller in exchange for shares, section 135 TCGA 1992 can treat the exchange as a reorganisation rather than a disposal. It applies where Newco will hold more than 25% of the ordinary share capital of the target, where the notes are issued under a general offer made on condition that Newco gains control, or where Newco will hold the greater part of the voting power. What happens next depends on whether the notes are qualifying corporate bonds (QCBs):

  • QCB loan notes. Section 116(10) calculates the gain as if the shares had been sold at market value on the exchange, then holds that gain over until the notes are redeemed or otherwise disposed of. The frozen gain is charged on redemption even if the buyer cannot repay the notes in full, as explained further in our guide to gilts and qualifying corporate bonds.
  • Non QCB loan notes. The notes stand in the shoes of the shares under section 127, taking over their base cost. A gain arises only when the notes are redeemed, and a loss on them can be allowable.

The catch with both is relief. HMRC’s Capital Gains Manual at CG64161 says that without an election it would be unusual for the conditions for Business Asset Disposal Relief to be met when a frozen QCB gain later comes into charge, because the seller will rarely still own 5% of a trading company and work for it. CG64155 makes the same point for non QCB notes and shares in the buyer. The answer is an election (section 169R for QCBs, section 169Q otherwise) treating the exchange as a disposal so relief can be claimed now. Both elections must be made by the first anniversary of 31 January following the tax year of the exchange, and HMRC says a partial election covering only some of the shares is not possible.

If instead the price is paid in full and the seller lends money back to Newco, HMRC treats that as a sale for full consideration followed by a separate loan (CG72800, citing Coren v Keighley), so the whole gain is taxed at completion and no deferral applies.

How are deferred payments and earn outs taxed?

A fixed sum payable later, for example in three annual instalments, is brought into the computation in full at the date of sale under section 48 TCGA 1992, with no discount for waiting. If part later proves irrecoverable, a claim can be made to adjust the computation. If the price is payable by instalments over more than 18 months, section 280 lets the tax be paid by instalments over up to 8 years.

An earn out whose amount depends on future profits is unascertainable. The value of the right is taxed as part of the sale proceeds, and each later payment is a disposal of that right, which normally does not qualify for Business Asset Disposal Relief (CG14970). Where the earn out is to be satisfied only in shares or loan notes of the buyer, section 138A can treat the right as a security so that the share exchange rules apply instead. The detail is in our guide to earn outs and deferred consideration.

Could part of the price be taxed as employment income?

Where the outgoing owner stays on for a handover, some of the price may really be pay. HMRC’s Employment Related Securities Manual at ERSM110940 lists indicators that an earn out is sale consideration rather than remuneration: the sale agreement shows it is part of the price for the shares, its value reflects the value of the shares, it does not make up for below market pay, it is not conditional on continued employment beyond a reasonable requirement to protect the value of the business, it contains no personal performance targets, and former employees receive it on the same terms as those who stay. Where an earn out is partly a reward for services, HMRC apportions it on a just and reasonable basis.

Which clearances are usually sought?

Two statutory clearances are usually requested together from HMRC’s Clearance and Counteraction Team:

  • Section 138 TCGA 1992. Section 137 can deny the share exchange treatment where a main purpose of the arrangements is to avoid Capital Gains Tax. Clearance under section 138, obtained before the loan notes or shares are issued, confirms that section 137 will not apply.
  • Section 701 Income Tax Act 2007. This seeks confirmation that the transactions in securities rules will not be used to tax the proceeds as income.

HMRC says it will reply within 30 days. Applications set out each step, the commercial reasons, shareholdings before and after, connections between shareholders and the consideration each will receive. Under section 138(5) a clearance is void if the application did not fully and accurately disclose all material facts.

When do the transactions in securities rules bite on a buyout?

The rules are aimed at shareholders who take company reserves as capital while keeping their interest in the business. Section 686 of the Income Tax Act 2007 excludes a transaction where there is a fundamental change of ownership, which since 6 April 2016 means that the original shareholders, together with their associates, hold no more than 25% of the ordinary share capital, distribution rights or voting rights afterwards (CTM36830). Original shareholders are everyone who held ordinary shares immediately before the transaction, so where the managers already owned shares in the target, they count too, and the exclusion may not be available.

CTM36851 gives an example where clearance is unlikely: one spouse forms a new company to acquire the family company and pays the departing spouse in cash or loan notes representing company reserves.

Worked example

Illustration only. Helen founded a trading company and has owned all of it, as a director, for many years. Her shares cost £1,000. Three managers form Newco, which buys the company in 2026 to 2027 for £3,000,000: £2,000,000 in cash at completion, £500,000 fixed deferred consideration over the next three years and £500,000 of QCB loan notes issued in exchange for shares.

  • The cash and fixed deferred sum are taxed in 2026 to 2027 under section 48: a gain of roughly £2,499,000.
  • The gain attributable to the loan notes, roughly £500,000, is frozen under section 116(10) until redemption.
  • Helen has not used her lifetime limit, so the first £1,000,000 of the 2026 to 2027 gain is taxed at 18% and the rest at the normal rates.

Because the cash gain alone uses the whole £1 million limit, a section 169R election would only bring the loan note gain into charge earlier without reducing the rate. Where the cash gain is below £1 million, the election can be valuable, so run the numbers before the deadline.

What mistakes come up most often?

  • Assuming the frozen gain on QCB loan notes will qualify for relief when the notes are redeemed years later.
  • Making a section 169R or 169Q election where the lifetime limit is already used, accelerating tax for no benefit.
  • Applying for clearance after the loan notes have been issued, when section 138 requires the application before the issue.
  • Drafting the earn out like a bonus, with personal targets, so HMRC treats it as pay.

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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.