Selling your business by instalments - a tax trap

When is the date of sale?

A important factor when considering capital gains tax (CGT) is that a transaction is treated as taking place when a deal is agreed and not when payment is made. It’s therefore possible to be liable to pay CGT on the sale of an asset for which you haven’t yet been paid. This cash-flow problem commonly crops up when selling an asset, typically a business, in exchange for instalment payments .

Example. In February 2022 Sarah signs an unconditional contract for the sale of her business. The only asset potentially liable to CGT is the goodwill, which is valued at £800,000. Because she started her business from scratch the whole £800,000 is a capital gain. The buyer can’t raise the cash for the business all at once and so Sarah allows it to pay in four equal annual instalments. For CGT purposes the sale occurred in 2021/22 and so Sarah must pay tax on the gain by 31 January 2023. Because Sarah is entitled to CGT business asset disposal relief her tax bill will be £80,000 (£800,000 x 10%), assuming she had already used her CGT annual exemption for 2021/22.

Tip. If selling an asset near the end of a tax year, consider delaying the contract until the start of the next one. Unless the asset is a residential property, the CGT payable on any gain will be due a full year later than it would be had the sale occurred on the date originally planned.

The uncertainty factor

Whenever payment for an asset is wholly or partly deferred over a long period you run the risk that the buyer’s financial circumstances will change for the worse and they won’t be able meet all the payments. Regardless of this risk you’ll be lumbered with a CGT bill on the gain as if you had received the whole amount stated in the contract, at least in the medium term. Therefore, in our example, assuming that the buyer was unable to pay the final instalment, instead of a netting £720,000 (after tax) from the sale of her business, Sarah’s cash position would be:

Tip. If Sarah can prove to HMRC that the unpaid £200,000 owed to her would be permanently irrecoverable from the buyer, she can claim a corresponding tax reduction, i.e. £20,000, by submitting a special tax claim (see The next step ). The sooner she does this the better.

Reducing your risk

The sale of a business can be structured to prevent having to pay tax on the full proceeds before you receive them, e.g. a staggered sale, i.e. by selling a portion of the business in each of a series of sales. Or, if you’re selling shares in your company, arranging for it to purchase all or some of them. These methods usually involve tricky tax rules and prior approval of the tax treatment from HMRC. Therefore, unless you’re well versed in the procedures involved, and able to draw up or at least check the legal contracts they involve, you should get your accountant and solicitor involved at an early stage in the negotiations with the buyers.