Tax When Selling a Business UK: How Cash, Deferral and Loan Notes Land Differently
22 Oct 2026 · Unlocked · 13 min read
On a £2,000,000 sale, a seller who takes most of the price over four years can owe £419,256 of capital gains tax on 31 January 2028 having received only £400,000 by then (worked example below, GOV.UK rates checked 22 October 2026). The tax when selling a business UK shareholders pay depends on how the price is paid as well as on its size. The lawful answers to how to avoid tax when selling a business UK sellers can use are mostly about timing and relief, and they are fixed in the heads of terms when selling a business uk.
What Deal Structure Means for Tax
What is deal structuring? On a share sale, it is the agreement on how and when the buyer pays for the shares. Three forms cover most private company sales:
- Cash at completion: the whole price paid on the day the shares transfer.
- Fixed deferred consideration: set amounts paid on set dates after completion.
- Loan notes: debt securities the buyer issues for some or all of the shares and redeems later.
Each form changes the date the gain is taxed, and loan notes can change the rate. Earn-outs, where the amount depends on future results, follow their own rules.
The Tax Baseline: CGT and BADR on a Share Sale
A selling shareholder pays capital gains tax on the gain. From 6 April 2026 the rate is 18% on gains within the unused basic rate band and 24% above it, after a £3,000 annual exempt amount for 2026 to 2027 (GOV.UK, "Capital Gains Tax rates", checked 22 October 2026). The gain is the proceeds less the base cost and allowable costs of sale, worked through in Capital Gains Tax When You Sell a Limited Company.
Where the shares qualify, Business Asset Disposal Relief taxes gains at 18% for disposals from 6 April 2026, 14% for disposals between 6 April 2025 and 5 April 2026 and 10% for disposals on or before 5 April 2025 (GOV.UK, "Business Asset Disposal Relief", checked 22 October 2026), up to a £1 million lifetime limit (HMRC helpsheet HS275, 2026). The qualifying conditions are in Business Asset Disposal Relief Explained for Company Sellers. Because the relief rate now equals the basic rate of capital gains tax, its value lies in keeping qualifying gains out of the 24% rate.
Cash Up Front: Tax Point at Completion
The gain on cash paid at completion arises in the tax year of completion, and the tax is due by 31 January following the end of that tax year (HMRC Capital Gains Manual CG14910, checked 22 October 2026). A sale completing on 1 March 2027 falls in 2026 to 2027, so the tax is due on 31 January 2028, and the seller holds the whole price in the meantime.
Deferred Consideration: Taxed in Full at Completion
Deferred consideration tax catches sellers out because the tax point does not move with the cash. Where the deferred amount is fixed, all of it is included in the disposal proceeds at completion, and nothing further is taxed when the payments arrive (HMRC Capital Gains Manual CG14881, checked 22 October 2026). TCGA 1992 s48 allows no discount for the wait or for the risk that it is never paid (CG14930, checked 22 October 2026). If part later proves irrecoverable, the seller can claim an adjustment (CG14930).
Paying the Tax in Instalments Under Section 280
TCGA 1992 s280 lets the seller ask to pay the tax in instalments where the instalments of consideration begin no earlier than the disposal, run for more than 18 months and continue beyond the normal due date (HMRC Capital Gains Manual CG14910, checked 22 October 2026). A Higher Officer at HMRC approves the calculation.
HMRC normally expects tax equal to 50% of each instalment of consideration until the liability is paid. Instalments falling due on or before the normal due date are taxed on that date, later ones on the date the seller is entitled to them, and the tax instalments end by the earlier of the last consideration date and eight years after the normal due date (CG14910). The relief does not apply where the consideration is a new asset, such as debentures redeemed in stages (CG14910).
Loan Notes: Deferring the Gain, Not Just the Cash
Tax on loan notes follows the share exchange rules. When the buyer issues loan notes for shares, TCGA 1992 s135 applies, with s116 on top for a qualifying corporate bond, and there is no disposal of the shares at the exchange for the part of the price paid in notes (HMRC Capital Gains Manual CG64155 and CG64161, checked 22 October 2026). The gain moves to a later date along with the cash. TCGA 1992 s137 counteracts that treatment where a main purpose of the arrangements is to avoid capital gains tax (legislation.gov.uk, checked 22 October 2026).
QCBs vs Non-QCB Loan Notes
Qualifying corporate bonds are securities that meet the criteria in TCGA 1992 s117, and a gain on disposing of a QCB is not a chargeable gain (HMRC Capital Gains Manual CG53702 and CG53703, checked 22 October 2026). When shares are exchanged for QCBs, the gain on the shares is calculated at the exchange and held over until the QCBs are disposed of, usually on redemption (CG64161).
A non-QCB loan note is treated as the same asset as the original shares, so the gain rolls into the notes and is taxed when they are disposed of (CG64155, checked 22 October 2026). The terms of the loan note instrument decide which treatment applies.
Preserving BADR With a Section 169R Election
Sellers asking how to avoid capital gains tax on selling a business UK often look at loan notes, but deferral can cost the relief. A gain held over on QCBs is charged on redemption, and HMRC notes it would be unusual for the relief conditions to be met then (CG64161, checked 22 October 2026).
A section 169R election brings the held-over gain into charge at the exchange so Business Asset Disposal Relief can be claimed on it. It covers all the shares exchanged and must be made by the first anniversary of 31 January following the tax year of the exchange (CG64161): 31 January 2029 for a 2026 to 2027 exchange. For non-QCB notes, a section 169Q election does the same job with the same deadline (CG64155).
Earn-Outs: The Deferred Slice That Follows Different Rules
An earn-out's amount depends on future results, so it cannot be fixed at completion, and the CG14881 rule for ascertainable consideration does not apply. It is taxed under a different treatment that splits the sale into two disposals. Tax on Earn-Out Payments From a Business Sale covers that treatment, and How Earn-Outs Work When You Sell Your Business covers the targets and caps.
How the Three Structures Compare: A Worked Example
A founder sells 100% of a trading company for £2,000,000 on 1 March 2027. The shares cost £100, they qualify for Business Asset Disposal Relief with none of the £1 million limit used, the founder's income fills the basic rate band, and fees are ignored (all illustrative assumptions). The steps below work as a tax on selling a business UK calculator for each structure, using the GOV.UK rates checked on 22 October 2026 and assuming they do not change.
Cash up front. The gain is £2,000,000 − £100 = £1,999,900.
- First £1,000,000 at 18%: £180,000
- Remaining £999,900 − £3,000 annual exempt amount = £996,900 at 24%: £239,256
- Tax: £180,000 + £239,256 = £419,256, due 31 January 2028
Deferred consideration. £400,000 at completion and £400,000 on 1 March in each of 2028, 2029, 2030 and 2031. The tax is the same £419,256, all due on 31 January 2028 without instalment relief, which is £19,256 more than the £400,000 received by then. The s280 instalments are:
- 50% of the £400,000 paid on or before 31 January 2028: £200,000, due 31 January 2028
- 50% of the £400,000 paid on 1 March 2028: £200,000, due 1 March 2028
- Balance: £419,256 − £400,000 = £19,256, due 1 March 2029
QCB loan notes. £400,000 cash and £1,600,000 of QCBs redeemed at £400,000 on 1 March in each of 2028 to 2031. The base cost splits pro rata, £20 to the cash and £80 to the notes.
- Cash gain: £400,000 − £20 = £399,980, less £3,000 = £396,980 at 18%: £71,456 (rounded), due 31 January 2028
- Held-over gain: £1,600,000 − £80 = £1,599,920, a quarter (£399,980) charged on each redemption
- Each redemption without relief: (£399,980 − £3,000) × 24% = £95,275, four times: £381,101 (rounded)
- Total: £71,456 + £381,101 = £452,557
With a s169R election, the whole gain is taxed at the exchange as in the cash case: £419,256 due 31 January 2028.
| Cash up front | Deferred, with s280 | QCBs, no election | QCBs, s169R election | |
|---|---|---|---|---|
| Cash received by 31 January 2028 | £2,000,000 | £400,000 | £400,000 | £400,000 |
| Tax due 31 January 2028 | £419,256 | £200,000 | £71,456 | £419,256 |
| Total tax | £419,256 | £419,256 | £452,557 | £419,256 |
| Last tax payment | 31 January 2028 | 1 March 2029 | 31 January 2032 | 31 January 2028 |
The QCB route without an election costs £33,301 more (£452,557 − £419,256) because £600,000 of the relief limit goes unused.
Choosing a Structure: Cash, Security and Tax in the Round
A commercial deal structure trades cash in hand and the buyer's ability to pay later against the tax. At the same price, cash up front leaves the seller with more money sooner, no credit risk and the same or lower tax, so deferred payments or loan notes are worth accepting for a higher price or a sale that would not happen otherwise. The questions for the adviser are whether the instalments meet the s280 conditions, whether the notes are QCBs, and whether an election is needed to keep the relief.
Credit risk bites hardest with QCBs: because a gain on a QCB is not chargeable, a loss on one is not allowable (TCGA 1992 s16(2)), and the held-over gain is still charged on disposal. Security for the deferred amount is a negotiating point. This article assumes a share sale; shares against assets is covered in Share Sale or Asset Sale: Which Leaves the Seller Better Off?, and payments for staying on in Staying On as an Employee After Selling Your Company.
Clearances, Deadlines and HMRC Checks
A share exchange for loan notes can get advance HMRC clearance under TCGA 1992 s138. Either company applies in writing before the notes are issued, and HMRC decides within 30 days of the application or of any further information it requests (legislation.gov.uk, checked 22 October 2026).
Where no statutory clearance applies and the law is genuinely uncertain, the non-statutory clearance service gives written advice, usually within 28 days (GOV.UK, "Non-Statutory Clearance Service guidance", updated 26 August 2026). HMRC will not advise on tax planning, and a refusal is not a ruling on how the transaction is taxed. Diarise 31 January after the tax year of completion for the tax, and the first anniversary of that date for a s169Q or s169R election.
Frequently Asked Questions
Conclusion: Fix the Price, Then the Structure
The structure comparison only matters once the headline value is known. Run the company through the business valuation calculator to set the price, then take this worked example to the adviser with the seller's own figures before heads of terms are signed.
