CGT on share sales

Tax on sale of private company shares

If you sell your shares CGT is payable on any gain made. The rules vary depending upon the timing of the payment which may be paid in full, or deferred by the buyer. The payment you receive may be in the form of any or all of these:

• shares in the purchasing company (so it would be a share for share exchange);
• deferred consideration under some form of earn out arrangement; and/or
• payment in the form of loan notes.

The tax treatment for each of these gives rise to different issues.

We will look at each of these in turn.  But first we will at look how the capital gain will be calculated and when any Capital Gains Tax (CGT) will be due for payment.

How will the capital gain be calculated in the UK?

An individual selling shares in a company will be liable to pay CGT on the gain (or deemed gain) arising on a sale.

Tax is calculated on the value of the consideration received less:

• the acquisition cost (the base cost);
• incidental costs associated with purchase and sale (for example, legal fees); and
• any capital losses in the same year or carried forward from a previous year.

You will only have to pay CGT on the gain above your tax-free allowance (assuming the allowance not been set off against other capital gains in the year).

From (6 April 2025) the rate of tax payable is 18% for basic rate tax payers or 24% for higher and additional rate tax payers if you are selling shares. The rate of CGT payable on the sale of certain shares will reduce to 14% if you qualify for BADR Business Asset Disposal Relief. For sales completed before 6 April 2025 the applicable CGT rates are 10% basic rate and a 20% higher rate, with the lower 10% rate also applying if you qualify for BADR.

When is the Capital Gain Tax payable?

For the sale of shares in trading companies the CGT is payable by 31 January in the year following the end of the relevant tax year.  So for gains arising on sales made in the tax year 2025/26, the CGT would be payable by 31 January 2027.   The rules for the timing of payment of tax on property transactions are different.

CGT liability for Consideration Shares

There are a number of issues to think about if the consideration for some or all of the shares being sold is comprised of shares in the buyer company (the Buyer).

If there is a CGT liability, then provided that:

• the Buyer will hold more than 25% of the ordinary share capital of Company; or
• as a result of the offer to buy shares the Buyer will control the Company or hold the greater part of the voting rights in the Company,

you have a choice on when you pay the CGT on the gain arising on the exchange of your shares for consideration shares.  You can either:

• defer payment of the tax and pay the CGT when your shares in the Buyer are eventually sold; or
• if you qualify for Business Assets Disposal Relief BADR you may elect to pay CGT on the gain now and pay tax at the rate of 14% now (rather than 24% if BADR did not apply).

Why pay CGT sooner rather than later?

Our client often ask why they should pay CGT on the total planned consideration for the tax year of disposal knowing that further consideration could be received in the future and payment of CGT could be spread?

The advantage of paying CGT now and claiming BADR is that:

• the rules relating to BADR may change in future; and
• depending on the circumstances post completion, you may no longer qualify for BADR if you can no longer satisfy the relevant tests.

There are anti avoidance rules to prevent abuse.

CGT on Deferred Consideration

The CGT liability for deferred consideration payable under an earn-out or similar arrangement is calculated on the estimated value of the deferred consideration to be received post completion.

The treatment of the deferred consideration for CGT purposes depends on whether the amount of the deferred consideration is regarded as “known or ascertainable” or is “unascertainable” deferred consideration.

Deferred consideration could be paid in the form of cash, shares or loans.

Known or Ascertainable Deferred Consideration

Where the amount is known (for example a number of known annual instalments) this figure can be included in the calculation of the total consideration paid on completion.

You can claim a refund from HMRC if it turns out later that you have overpaid CGT because you did not actually receive the full amount of the deferred consideration.

The advantage of paying the CGT for the amount of the deferred consideration at the time you pay the CGT for the completion consideration is that you may be able to claim BADR on the full amount because you satisfied the BADR tests at the time of completion.

If CGT is payable on the deferred consideration at a later date, you might not be able to satisfy the relevant test for BADR – for example, you may not still hold 5% of the shares of the Company and/or may no longer be an employee/director.

Unascertainable Deferred Consideration

This is slightly more complicated.

If the amount of the deferred consideration is not ascertainable because it depends on what happens in the future (so, for example, a percentage based on future profits of the company that was sold), then the right to receive that future amount is treated as an asset (which has to be valued).

Then, when that part of the consideration is actually received, it is treated as consideration not for the original shares but for the right to receive that deferred consideration.  If there are several occasions on which future payment is received – for example because there is a % paid for profits across several years – there will need to be a calculation of CGT for each payment of deferred consideration that is received.

Similar to ascertainable deferred consideration, the other issue is that if the CGT liability arises post completion, you may not be able to satisfy the tests to obtain BADR.

CGT liability for Loan Notes

From a CGT perspective, you will be liable for the total amount outstanding on the Loan Notes at completion.  However, if they are not redeemed in full, it would be possible to claim a refund of CGT paid to the extent that the consideration was not received.

Interest paid on the loan note falls outside the CGT calculation. Income tax would be payable on loan notes where the income is not compounded with the capital sum.