Paying Capital Gains Tax (CGT) by Instalments: Understanding the Rules and Practical Applications

Capital Gains Tax (CGT) is typically payable in full by the 31 January following the end of the tax year in which the gain arises. However, in some situations, particularly where the sale involves deferred consideration, taxpayers may be eligible to pay CGT in instalments under Section 280 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). This is particularly relevant in scenarios such as management buyouts (MBOs), where the consideration is paid in instalments over several years.

In this guide, we will explore the rules for paying CGT by instalments, including how the process works, the limitations, and practical examples to help you understand the potential benefits and challenges.

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What is CGT Payment by Instalments?

Under TCGA 1992, Section 280, taxpayers who sell an asset and receive the sale consideration in instalments may apply to HMRC to pay the CGT on that gain by instalments rather than as a single lump sum. This option is available under the following conditions:

• The consideration (or part of it) is payable by instalments over a period exceeding 18 months.
• The taxpayer may pay CGT in instalments for up to eight years.
• Instalment payments are calculated as 50% of each instalment of consideration received until the full tax is paid.

Why Allow CGT Payment by Instalments?

The purpose of this provision is to prevent taxpayers from facing a cash flow problem, where they are required to pay CGT before they have actually received sufficient funds from the sale to cover the tax liability.

Example:

Sarah sells shares in a private company for £300,000, payable in annual instalments of £50,000 over six years. Her CGT liability is calculated at £60,000.

• Normally, CGT would be due by 31 January following the end of the tax year of sale.
• However, since the consideration is paid in instalments over more than 18 months, Sarah can apply to pay the CGT in instalments.
• Each year, she will pay 50% of the instalment received as a CGT payment until the tax is fully paid.

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How CGT Payment by Instalments Works: A Step-by-Step Guide

Step 1: Determine Eligibility

• The sale consideration must be payable in instalments over more than 18 months.
• The CGT can be paid by instalments for a period of up to eight years.

Step 2: Calculate the CGT Due

• Calculate the CGT based on the total gain from the sale.
• This is the full CGT amount that must be paid over the instalment period.

Step 3: Calculate Instalment Payments

• The CGT is payable in instalments equivalent to 50% of each instalment of consideration received.
• The remaining CGT is paid as the remaining instalments of the sale consideration are received.

Step 4: Apply to HMRC

• The taxpayer must apply to HMRC for permission to pay CGT by instalments.
• The application should detail the payment structure and demonstrate that the conditions of Section 280 are met.

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Practical Example: How CGT Instalments Work

Example: Management Buyout (MBO)

John is the owner of a private company and sells his shares in the company to the management team through an MBO for £180,000, payable in monthly instalments of £5,000 over three years (36 months). His CGT liability is calculated at £45,000.

Payment Calculation:

• By the normal CGT due date (31 January following the end of the tax year), John has received £40,000 (8 monthly instalments).
• John applies to pay the CGT by instalments.
• His CGT payments are calculated as 50% of each instalment received.

Explanation:

• John pays CGT equivalent to 50% of each instalment received.
• By the end of the instalment period, his CGT is fully paid.

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Limitations and Exclusions: When Section 280 Does Not Apply

1. Consideration Paid Upfront

• If a substantial part of the consideration is paid upfront (within 18 months), Section 280 may not apply.
• Example: If John had received £90,000 immediately at the time of sale and the remaining £90,000 in instalments, only the instalment portion would qualify for payment by instalments.

2. Consideration in the Form of Assets

• Section 280 does not apply if the deferred consideration is paid in the form of non-cash assets (e.g., shares, property, debentures).
• Example: If John receives shares instead of cash for the remaining consideration, he cannot pay CGT by instalments under Section 280.

3. Earn-Out Arrangements

• If the deferred consideration is based on an “earn-out” (future performance of the business), this is considered unascertainable consideration and is treated as a separate asset. Section 280 cannot be used.

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Practical Tips for Paying CGT by Instalments

1. Assess Your Payment Structure: Ensure that the consideration is payable in instalments over more than 18 months.

2. Understand the 50% Rule: Be aware that each instalment of CGT is calculated as 50% of the consideration received.

3. Apply to HMRC Promptly: Do not assume that instalment payments are automatic – you must apply for them.

4. Keep Records: Maintain detailed records of each instalment received and the CGT paid.

5. Plan for Cash Flow: Make sure you can afford the CGT instalments as they become due.

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When CGT Instalments Are Not Suitable

While CGT instalments can help ease cash flow, they may not be suitable in all situations:

• If the sale involves non-cash consideration, such as shares or debentures.
• If the instalment payments are uncertain or depend on future events (earn-out).
• If the upfront payment is significant, making instalments unnecessary.

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Optimize Your CGT Payments with Merranti Accounting

Navigating the rules for paying CGT by instalments can be complex. At Merranti Accounting, we help you:

• Assess whether you qualify for CGT instalments.
• Structure your sale to optimize tax payments.
• Ensure compliance with HMRC rules.