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Earn-outs and deferred consideration

Lisa Stevenson (Parisi Tax) answers a question on the tax implications on deferred consideration and earn-out consideration following the selling of shares in a company and how to structure the earn-out.

Question

My clients (Anthony and Ben) are selling their shares in a design company for a mixture of cash at completion deferred consideration (payable on the first anniversary) and earn-out consideration (of £4m payable over four years if certain revenue targets are met). Anthony will stay in the business although he will no longer be a shareholder. Ben is neither an employee nor a director and will have no role in the business. Anthony qualifies for entrepreneurs’ relief (ER) on the sale but Ben does not. How will they be taxed on the deferred consideration and the earn-out consideration and how is it best to structure the earn-out?

Answer

The...

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