Most owners selling an advice firm expect to pay capital gains tax on the money they receive, in the year they receive it. That is a reasonable expectation, and for a straightforward completion payment it is broadly what happens. Earn-outs break the pattern. Depending on how the earn-out is written, HMRC can tax you at completion on an estimate of what the earn-out might eventually pay, years before a penny of it arrives, and in the worst case on money that never arrives at all.
This is not an obscure technicality. It flows from a decided case, Marren v Ingles, on which HMRC's own guidance on unascertainable consideration still rests, and it catches sellers of advice firms regularly because so much of the price in this market is deferred against client retention and recurring income. What follows is general information about how the rules work, not advice on your own position. The numbers in any real deal turn on drafting, and you should have a specialist tax adviser look at the sale agreement before you sign it, not after.
Two kinds of deferred consideration
The tax treatment splits on one question: at completion, is the deferred amount ascertainable or unascertainable?
Deferred consideration is ascertainable when the amount is fixed or can be worked out at completion, even though it is paid later. A deal that says the buyer will pay a further £300,000 in twelve months, provided you are still alive to bank it, is ascertainable. So is a payment that is fixed but contingent, for example £300,000 payable only if a named condition is met. For ascertainable amounts, the whole sum is brought into your capital gains computation in the year of the disposal. You are taxed up front on the full amount, and if a contingent element later fails to pay, there is a mechanism to adjust the computation and recover the overpaid tax.
Deferred consideration is unascertainable when the amount cannot be known at completion because it depends on future events. This is the classic advice firm earn-out: a further payment calculated as a percentage of the recurring income still attaching to the client bank at the first and second anniversaries, or a multiple of funds under management that transfer and stay. Nobody can say at completion what that figure will be, because it depends on how many clients novate across, how markets move the FUM, and how retention holds. Unascertainable consideration is where Marren v Ingles takes over, and where the trap sits.
What Marren v Ingles actually decided
The case established that when you sell an asset partly for cash and partly for the right to receive unascertainable future payments, you have really received two things at completion: the cash, and a separate asset, the right itself. Lawyers call that right a chose in action. For tax purposes it does not matter what it is called; what matters is that the right is an asset in its own right, and it has a value on the day you acquire it.
The consequences run in two stages. At completion, your disposal proceeds are the cash received plus the estimated market value of the earn-out right. That estimated value has to be agreed or defended, typically with input from a valuer, and it reflects what a third party might pay today for the right to those uncertain future payments. Capital gains tax is charged on the whole amount, including the estimate, in the year of the sale.
Then, each time the earn-out actually pays, you make a second disposal: you are treated as disposing of part or all of the earn-out right itself. The gain or loss on that second disposal is the amount received less the value that was attributed to the right at completion. If the earn-out pays more than the estimate, you have a further gain. If it pays less, you have a capital loss on the right.
The trap, stated plainly
Put those stages together and the trap is visible. Suppose the up-front payment is £600,000 and the earn-out right is valued at £400,000 at completion. You are taxed in year one on £1 million of proceeds, even though you have only banked £600,000. If the earn-out then underperforms, because client retention disappoints, because the buyer's integration alienates the client bank, or because the buyer's covenant fails altogether, you have already paid tax on £400,000 of value that never turned into cash.
Three features make this worse than it first sounds. The loss you make on the earn-out right in a later year is a capital loss, and capital losses are only useful if you have capital gains to set them against. A retiring adviser who has just sold their one substantial asset often has none. The tax on the estimated value falls due on the normal self assessment timetable for the year of sale, so the cash to pay it has to come out of the completion payment. And the second-stage disposal is a disposal of a right, not of shares in your trading company, which matters for relief, as covered below.
The rates themselves are on public record. For disposals from Mon 6th Apr 2026, Business Asset Disposal Relief taxes qualifying gains at 18 per cent, within a lifetime limit of £1 million of qualifying gains per person as set out in HMRC's HS275 helpsheet. Gains outside BADR are charged at the rates on GOV.UK's Capital Gains Tax pages, which for 2026-27 are 24 per cent for higher-rate taxpayers, with an annual exempt amount of £3,000. Those are the 2026-27 figures as they stand; an Autumn Budget can change them.
Why the second slice can lose relief
Here is the part sellers most often miss. BADR attaches to the disposal of your business or your shares in your trading company. The completion disposal, including the estimated value of the earn-out right, will usually qualify if you meet the conditions. But the later disposal, when the earn-out pays out, is a disposal of the earn-out right itself. A chose in action is not shares in a trading company, and the general position is that BADR is not available on that second-stage gain.
The practical effect is a rate cliff inside a single deal. The portion of your gain crystallised at completion may be taxed at the BADR rate, while any further gain when the earn-out overdelivers is taxed at the full CGT rate. The higher the proportion of the price sitting in the earn-out, the more of your eventual proceeds risk falling on the wrong side of that cliff. This is one of several reasons the split between up-front and deferred consideration deserves as much negotiation as the headline number, a point developed in the questions to ask before you agree to an earn-out.
The reliefs and elections that soften it
The legislation does offer some protection, and the sale agreement can be structured to reach it. Three mechanisms matter most.
First, loss carry-back. Where you make a loss on the disposal of an earn-out right, an election exists to treat that loss as arising in the year of the original sale rather than the year the earn-out failed. That lets the loss be set against the very gain that was overtaxed, generating a repayment, instead of stranding it in a later year with nothing to absorb it. The election has time limits and conditions, and it is precisely the sort of thing a specialist should diary at completion rather than discover at the deadline.
Second, paper-for-paper treatment. Where the earn-out right can only be satisfied in shares or loan notes of the buyer, rather than cash, the legislation can treat the right as a security, which rolls the gain over so that tax falls due when the shares or notes are eventually sold, not at completion. That defers the dry tax charge, but it swaps a timing problem for an exposure problem: your deferred value is now locked into the buyer's paper, with everything that implies about their covenant. The trade-offs overlap heavily with those discussed in deferred consideration and how to protect it.
Third, structuring the deferred element as ascertainable where the commercial deal allows it. A fixed deferred payment, or a fixed sum contingent on a defined event, avoids Marren v Ingles entirely and keeps the whole computation in the year of sale under the ordinary rules, with an adjustment route if a contingency fails. Buyers in this market often want genuinely performance-linked earn-outs against recurring income and client retention, so a fully fixed structure is not always on offer, but a hybrid, part fixed and part variable, changes how much of the price the trap can touch.
Why the structure of the earn-out changes the tax
Step back and the pattern is clear: two earn-outs that pay the seller identical amounts over identical periods can produce materially different tax outcomes purely because of drafting. Cash or paper. Ascertainable or unascertainable. A maximum cap stated or absent, which affects the completion valuation of the right. Whether the deal is a share sale or an asset sale in the first place, which sits upstream of all of it and is compared properly in the asset sale versus share sale tax comparison.
This is also why the earn-out's tax treatment cannot be bolted on at the end of a negotiation. By the time heads of terms have fixed the shape of the deferred consideration, most of the tax consequences are already decided. The time to involve a tax specialist is before heads of terms, when the split between up-front and deferred payment, and the currency the earn-out is paid in, are still open. The rest of the tax and timing pillar covers the surrounding decisions, including what the 18 per cent BADR rate means for a 2026 sale.
What to take from this
An earn-out is not just a commercial risk, it is a tax event with its own timetable, and the timetable can run ahead of the cash. If your deal includes unascertainable deferred consideration, expect a valuation exercise at completion, expect tax on that valuation in the year of sale, and make sure the completion payment leaves room to pay it. Ask your advisers, in terms, three questions: is the deferred consideration ascertainable or unascertainable, what value will be attributed to the earn-out right at completion, and what happens to relief and to losses if the earn-out underpays. If the answers are vague, the drafting is not finished.
None of this is a reason to refuse an earn-out. In the advice firm market, where value lives in recurring income and client retention that only time can prove, deferred consideration is how most deals get done. It is a reason to price the tax into your view of the deal, and to take specialist advice on your own numbers before signing anything.
If you want a number of your own to react to before those conversations start, the free IFA valuation calculator gives you a range and explains the factors affecting it.