Publish Date

Jan 14, 2021

Impact on Management Equity Plans in Transactions in Light of the Office of Tax Simplification’s Capital Gains Tax Review in the U.K.

A&M Tax Advisor Update

In November 2020, the Office of Tax Simplification (“OTS”) published its review of the Capital Gains Tax (“CGT”) regime including a number of recommendations on its application in the U.K. Recommendations include aligning the CGT rates (currently up to 20% or 28% depending on assets) with income tax rates (currently up to 45%, or 46% in Scotland), reducing the Annual Exempt Amount and reviewing Business Asset Disposal Relief (“BADR”). [1] Please note that these recommendations have no legal force and may or may not be implemented by the U.K. Government. Any changes may be announced in the forthcoming Budget on 3 March 2021.

In this article, we have considered a number of potential impacts on equity held by management and we cover some key considerations for management sellers. Management selling shares on a transaction may consider whether and how they could ‘de-risk’ their position in advance of any potential CGT changes. The form of payment they receive at completion for their equity will have different tax consequences as set out below.


  • Cash payments crystallise an immediate CGT event in the tax year of disposal.
  • Sellers should be taxed at current CGT rates and may be eligible for BADR.


  • Earn-outs allow sellers to participate in future upside and buyers to tie up a portion of the sale consideration based on future performance for management to deliver. Deferred cash payments that can be quantified at completion should be subject to CGT in the tax year of disposal at current rates. However, if the cash earn-out is “unascertainable”, the treatment differs. The value of the earn outright is taken into account in the CGT computation in the year of the sale, then if the eventual payment is lesser or greater than the initial expected value there is an additional CGT event at the time the earn-out is paid.
  • Therefore, in structuring earn-outs, sellers and buyers might want to consider putting caps and floors on earn-outs and hard-wiring amounts into the calculations, to ensure the earn-out right is ascertainable, and as such, all taxed under the current legislation.


  • In many transactions, rollovers of equity are common to lock-in key managers.
  • In general, where sellers exchange their shares in the target for new shares or loan notes in the acquisition vehicle, the exchange or “rollover” can be structured to be tax-neutral from a CGT perspective. Subject to conditions, the seller is treated as acquiring the newly issued rollover shares or loan notes in the acquisition vehicle for their base cost in the target shares and the CGT point will be deferred until the sale of the new shares/redemption of the loan notes.
  • By deferring the tax point through a rollover, if CGT rates increase, or BADR is no longer available, the amount of CGT which will be chargeable on the gain would increase. Therefore, sellers may press for a cash-out based on current rules and then a re-investment of net proceeds in the acquisition vehicle.

The example below shows the potential impact of cashing out and rollovers…