What can be done?
Here are some thoughts to consider:
1. Reinvestment
The deal could be restructured so that the sellers receive cash consideration and then reinvest it into the shares or loan notes in the buyer company. This would bring the deal outside the reorganisation provisions and trigger a disposal of the shares under the basic rules above. The upside is that you capture the current CGT rates, which is advantageous if CGT rates are increased. The downside is that the sellers may have to fund the tax out of their own cash rather than their proceeds of sale. It may be possible to assist by structuring the deal so that the Sellers receive enough cash to pay the tax, and only reinvest the rest.
2. Replace the loan notes
The consideration loan notes could be replaced with a fixed cash sum payable in instalments. This would also ensure that a disposal of the shares is triggered under the basic rules above, but the CGT charge in this case would be calculated on the basis that the deferred consideration is payable in full on Completion. Of course, there is always a risk that the buyer fails to pay. If that were to happen, the sellers may be entitled to seek a refund of the overpaid tax – but there is a time limit on getting the refund (four years from the end of the tax year in which completion took place). It may be that the final payment can be timed to give the sellers the opportunity to seek a refund if necessary. In some cases, the Seller may even be able to pay the CGT by instalments.
3. Make an election
If neither of the above is practical, a seller could consider whether to make an election so that the reorganisation rules don’t apply and the CGT disposal is triggered on completion. There is quite a long window before a seller would need to make the decision on making the election, so this might offer some flexibility on a ‘wait and see’ basis. Of course, there is no guarantee that measures in the Budget will not be enacted to prevent sellers in these circumstances from having it both ways, so any sellers intending to take this route may want to elect before the Budget is handed down.
4. Consider the earn-outs
If the deal includes an earn-out, the earn-out might be wrapped into a new “security”. This rolls over the gain so that, if the earn-out isn’t achieved, the sellers don’t pay tax on value not realised. If this isn’t done, the sellers will pay CGT on the value of the right to receive the earn-out as at completion. The sellers would have to fund the extra CGT upfront without receiving the cash from the earn-out, but this would at least lock in that value at current CGT rates.
Of course, the value of a right to receive an earn-out isn’t an exact science and depends on how likely and to what extent it will pay out. If the earn-out actually paid is higher than the value given to it at completion, the difference would be subject to CGT at the rates in force when the amount is paid out. If the rumours are true, those may well be higher. But it is only that excess that would be taxed at that (potentially) higher rate – not the whole earn-out.