Earn-Outs and Deferred Consideration on a Dental Practice Sale: How Capital Gains Tax Works

A dental practice sale is not always paid for in one cheque on completion day. Corporate acquirers, and some independent buyers, frequently structure the price with retentions, deferred slices and performance-linked earn-outs, often tied to retained UDA delivery, patient retention or future EBITDA. The commercial logic is straightforward: the buyer ties part of the price to the value actually surviving the handover. The tax consequence is anything but straightforward, because the timing and certainty of the money change the capital gains tax treatment, sometimes splitting one sale into two separate taxable events and, in the process, losing the relief you assumed you had.

This article explains the three shapes consideration can take, the Marren v Ingles principle that governs uncertain earn-outs, why Business Asset Disposal Relief often does not reach the earn-out slice, and how s.280 instalment relief can ease being taxed on money you have not yet received. Throughout, BADR is 14% for disposals to 5 April 2026 and 18% from 6 April 2026, within the £1m lifetime limit per individual.

Why a dental sale often is not paid all at once

Where the buyer is a corporate group or a consolidator, deferred and contingent consideration is the norm rather than the exception. The buyer wants assurance that the patient base, the UDA contract and the goodwill genuinely transfer and survive, so they hold back part of the price and link it to performance over one to three years. Even independent buyers using bank finance may stage payments. The deal context for corporate buyers, where earn-outs cluster, is covered in corporate dental acquirers versus an independent sale. The key point for the seller is that the structure of the price drives the tax, so the structure has to be understood before signing, not after.

Three shapes of consideration

Consideration on a practice sale takes three broad shapes, and each is taxed differently:

• Cash on completion. Paid at the disposal, taxed in the normal way as part of the disposal of the business.
• Ascertainable deferred consideration. A fixed amount, known at the date of sale, but paid later (for example a fixed £300,000 due in 12 months).
• Unascertainable contingent consideration (an earn-out). An amount that cannot yet be calculated at the date of sale because it depends on future performance (for example 20% of retained private revenue over two years).

The line between the second and third shapes is the whole game. Ascertainable is taxed once. Unascertainable is taxed twice. Conflating them is the most common error sellers make.

Ascertainable deferred consideration: taxed up front

If the amount is fixed at the date of disposal, even though it is paid in future instalments, the full amount is brought into the capital gains computation now, at disposal. You do not get to wait until the cash arrives to be taxed on it. You may discount the figure only for a genuine risk that it will not be paid (for example a real concern about the buyer's solvency), not merely because payment is deferred. The disposal date itself is fixed by TCGA 1992 s.28 (for an unconditional contract, the date of exchange).

Example 1, ascertainable deferred consideration. (BADR 14% to 5 April 2026.) Dr Haddad sells for £900,000: £600,000 on completion and a fixed £300,000 payable in 12 months. Base cost is negligible, disposal in 2025/26, within the £1m BADR limit. The full £900,000 is ascertainable at disposal, so the whole gain of around £900,000 enters the CGT computation now: £900,000 × 14% = £126,000 CGT, due on the normal date even though £300,000 of the cash does not arrive until a year later. Because the deferral here is only 12 months, not more than 18, s.280 instalment relief (below) is not available on these facts.

The one relief on an ascertainable amount is for genuine non-payment risk. If, when the eventual instalment falls due, the buyer defaults and the money is irrecoverable, that can be addressed, but the route is a later claim (for example bad-debt or loss relief on the facts), not a discount taken up front simply because payment is in the future. So the seller of an ascertained-but-deferred slice is, in cash terms, funding the tax on money still owed to them. That is precisely the mismatch s.280 instalment relief is designed to ease where the timeline is long enough, and it is why sellers sometimes prefer to keep deferred slices short (paid within 18 months) and certain, or alternatively to make them genuinely contingent so the Marren v Ingles valuation, rather than the full face value, is taxed up front.

Unascertainable consideration and the Marren v Ingles principle

Where part of the price is a genuine earn-out whose amount is not calculable at sale, the tax takes a different, and counter-intuitive, shape. Under the principle in Marren v Ingles [1980] 1 WLR 983 (HL), the right to receive that future unascertainable consideration is itself a separate chargeable asset, a chose in action. So at the date of sale you are treated as receiving two things: the cash, plus the right to the earn-out. That right is given a market value and brought into the computation at disposal. Then, when the earn-out is later paid, the cash you receive is a capital sum derived from that right under TCGA 1992 s.22, which is a second disposal, the disposal of the right itself. One earn-out, two chargeable events.

The second disposal: gain or loss when the earn-out pays out

On the second disposal, the maths is the cash received against the value placed on the right at sale (which is the right's base cost):

• If the cash exceeds the valued right, there is a further gain on the second disposal.
• If the cash is less than the valued right, there is a loss. Because you may already have paid CGT on an over-valued right, TCGA 1992 s.279A to s.279D let you elect to carry that loss back against the original gain on the sale, rather than only against future gains. That carry-back is valuable, because the original gain is often the one that enjoyed the BADR rate.

The valuation placed on the right at sale therefore does double duty: it is the proceeds for disposal one and the base cost for disposal two, so it has to be defensible.

When does the first disposal happen? The s.28 date

For both the cash and the valued earn-out right, the first disposal crystallises on the CGT disposal date set by TCGA 1992 s.28, not on the day each instalment is paid. For an unconditional sale contract that is the date of exchange; for a conditional contract it is the date the last condition is satisfied. This matters for two reasons on an earn-out deal. First, it fixes the tax year in which the up-front gain (cash plus valued right) is taxed, and therefore which BADR rate band applies to it: 14% to 5 April 2026, 18% from 6 April 2026. Second, it fixes the date as of which the right to the earn-out is valued, because the valuation is taken at the moment of disposal. A deal that exchanges unconditionally before 6 April 2026 therefore locks the 14% rate on the whole of disposal one, including the valued right, even though the contingent cash may not arrive until a later tax year on which a different rate may apply. The interaction between the disposal date and the rate bands is set out in timing a dental practice sale around the 2026 BADR rise.

BADR on the earn-out element: the trap

This is the central planning point, and it is where sellers are most often caught out. BADR applies cleanly to the completion cash and to ascertainable deferred consideration, because those form part of the disposal of the business itself, with the qualifying conditions tested to the date of that original disposal. But the second disposal on an unascertainable earn-out, when the chose in action matures, is a disposal of a right, not of the business. The right is not itself a qualifying business asset. So BADR generally does not apply to the gain on that second event. The earn-out slice is then usually taxed at the main CGT rate (24% for higher-rate gains on current rules), not the BADR rate. The conditions BADR depends on are set out in BADR on a dental practice sale.

Example 2, the two disposals and the BADR trap. (BADR 14% to 5 April 2026, 18% from 6 April 2026; Marren v Ingles.) Dr Iqbal sells for £700,000 cash plus an earn-out of "20% of retained private patient revenue over two years", uncapped and uncertain.

• Disposal 1 (at sale, 2025/26): cash £700,000 plus the valued right to the earn-out, independently valued at, say, £150,000. Total proceeds £850,000. With BADR conditions met and within the £1m limit, the gain of around £850,000 at 14% = £119,000. The base cost of the chose in action becomes £150,000.
• Disposal 2 (when the earn-out pays, say 2027/28): the right matures and actually pays £230,000. As a capital sum derived from the asset (s.22): proceeds £230,000 less base cost £150,000 = an £80,000 gain. This is a disposal of the right, not the business, so BADR generally does not apply. At the 2027/28 main CGT rate (24% on current rules) that is £19,200, against £11,200 if BADR at 18% had reached it. The roughly £8,000 difference is the cost of the earn-out structure on the contingent slice.

(The 24% main rate here is current rules, flagged because a future-year main rate is outside the figures we lock today.) The lesson is to go into an earn-out knowing that the contingent slice is likely taxed without BADR, and to price that into the negotiation rather than assume the headline BADR rate covers the whole deal.

Loan notes as an alternative to a cash earn-out

Where the consideration can be fixed rather than left contingent, the parties sometimes use loan notes instead of a cash earn-out. Taking qualifying corporate bonds (QCBs) or non-QCB loan notes can defer or shape the gain, and can change the year in which it crystallises. But the BADR position on later redemption of the notes needs care, and an election may be required to preserve the relief that would otherwise be lost on the deferral. This is a structuring decision to take with advice on the specific deal, not an off-the-shelf scheme. The point here is only that fixed-consideration alternatives exist and behave differently from a contingent earn-out, so the choice between them is worth modelling.

The broad distinction worth understanding is that a QCB is generally exempt from CGT on its own disposal, so any gain rolled into it can fall out of charge if the relief position is not handled with an election, whereas a non-QCB loan note keeps the gain within the CGT net and defers it until redemption. The two routes therefore have opposite default outcomes for BADR, and which one a deal uses (and whether an election is made to fix the BADR position at the original disposal) materially changes the eventual tax. None of this is a reason to favour loan notes over a simple structure: it is a reason to take the loan-note question to your adviser early, because the relief can be preserved or lost depending on choices made at the point of sale, not afterwards.

Instalment relief: paying the CGT over time

Being taxed up front on ascertainable money you have not yet received creates a cash-flow squeeze. TCGA 1992 s.280 addresses it: where consideration is payable by instalments over a period exceeding 18 months, HMRC may allow the CGT to be paid by instalments over a period of up to eight years. It is HMRC's discretion, and it spreads the tax, not the gain. It is most useful exactly where the seller is taxed at disposal on a fixed deferred amount that lands over several years.

Example 3, instalment relief on long-dated deferred consideration. (TCGA 1992 s.280; BADR 14% in 2025/26.) Dr Novak sells for £1,000,000: £400,000 on completion and £600,000 in three equal annual instalments of £200,000, the first falling at month 24, so the instalment period exceeds 18 months. The full £1,000,000 is ascertainable, taxed at disposal: £1,000,000 × 14% (within the £1m limit) = £140,000 CGT. Because the consideration is payable by instalments over a period exceeding 18 months, Dr Novak may ask HMRC under s.280 to pay that £140,000 by instalments over up to eight years, easing the mismatch of being taxed in full on money that arrives over the following years.

Valuing the right at the date of sale

For an unascertainable earn-out, the value placed on the right at the date of sale is load-bearing, because it fixes both the completion-year proceeds and the base cost for the eventual second disposal. A reasonable market value takes account of the expected future payments, the probability of any performance hurdles being met, and discounting for time and risk. Over-value the right and you pay too much CGT up front (recoverable later via the s.279A loss carry-back if the payout disappoints). Under-value it and you risk an HMRC challenge and a larger second-disposal gain. A defensible, professionally prepared valuation is what holds both computations together.

It is worth keeping the valuation working papers with the rest of your sale records, because the same figure is referred to twice, years apart: once on the completion-year return as proceeds, and again on the payout-year return as the base cost of the maturing right. An HMRC enquiry into either year may ask how the figure was derived, and a contemporaneous valuation prepared at the time of sale carries far more weight than one reconstructed afterwards. Where the earn-out is uncapped and genuinely uncertain, expect the valuation to be a range with a reasoned central estimate rather than a single precise number, and make sure the basis is documented so it can be stood behind on both returns.

Dental-specific earn-out hurdles and their risks

Dental earn-outs tend to hang on a familiar set of hurdles, each carrying its own risk:

• Retained UDA delivery. The earn-out pays only if the NHS activity holds up after handover, which depends partly on associate retention.
• NHS contract novation succeeding. Where the contract transfers by novation with commissioner consent, a failed or delayed novation can trigger a retention or clawback against the price, which feeds straight into the contingent-consideration analysis (it lowers what the right is worth). This is covered in transferring the NHS dental contract on a practice sale.
• Private patient retention. A revenue-share earn-out on the private list rises or falls with how many patients stay.

Each of these usually makes the earn-out unascertainable, so the Marren v Ingles two-disposal treatment applies, and each makes the valuation of the right a genuine exercise in judgement rather than arithmetic.

Employment-linked earn-outs: the income-tax danger

There is a distinct trap where the earn-out is conditioned on the seller staying on and working in the practice during the earn-out period. If the structure looks like disguised remuneration for that ongoing work rather than consideration for the business, HMRC may treat part of the earn-out as employment income, taxed as earnings with National Insurance, rather than as a capital gain. That is a materially worse outcome than even the BADR-less main-rate CGT. To keep the earn-out on the capital side, it should be clearly framed as consideration for the goodwill and trade, not contingent on continued employment, and any genuine ongoing clinical work the seller does should be priced and paid separately at a market rate. This is a point to take advice on at the drafting stage, not to fix afterwards.

A seller's checklist before signing an earn-out

Before you sign a deal with deferred or contingent slices:

• Classify each slice. Is it ascertainable (fixed, taxed once up front) or unascertainable (contingent, two disposals under Marren v Ingles)?
• Get the right valued. A defensible market value sets the completion-year proceeds and the base cost for the second disposal.
• Model both disposals. Run the completion-year tax and the projected payout-year tax, including the likely loss of BADR on the second event.
• Check BADR availability on each event, and accept that the contingent slice is usually taxed at the main rate.
• Consider s.280 instalments where ascertainable consideration is payable over more than 18 months.
• Watch the employment-income line, and keep any ongoing work priced separately.
• Document everything, including the valuation basis and the classification of each slice.

We have modelled the two-disposal CGT position for a principal selling to a corporate on an uncapped earn-out, valued the contingent right for the completion-year return, and flagged precisely where BADR would and would not reach. The structure of the price is rarely just a commercial detail. On an earn-out it is the difference between one taxable event and two, and between the BADR rate and the main rate on a significant slice of your sale. For the base CGT-on-sale framework see capital gains tax on selling a dental practice, and for how phased exits and deferred proceeds fit together see gradual versus immediate sale of a dental practice. How you choose to take consideration ultimately rests on the asset-versus-share decision, covered in asset sale versus share sale on a dental practice.