Emergency Budget 2010: Misadvantage with loan notes

    View Author July 2010


    It is fairly common and usual for shareholders to sell their shares in private companies for a mixture of up-front consideration and deferred consideration. Buyers will often look to pay consideration on deferred terms as a method of funding the deal or sometimes to guarantee the performance of the target company after the sale completes. The deferred consideration is often recognised in the form of a loan note. Prior to the 22 June Budget, the loan note served two purposes: first it recognised the deferred consideration payable, and second it was a form of loan instrument that ensured that the tax payable on the deferred consideration could itself be delayed until the deferred consideration was paid out. Until the recent Budget, deferring the payment of the consideration did not prevent the shareholders from reducing their capital gains tax bill through the use of Entrepreneurs' Relief. This relief resulted in a 10% rate of capital gains tax on the first £2m of capital gain.

    On the face of it, the extension of Entrepreneurs' Relief to allow up to £5m of capital gain to be taxed at 10% looks to be a favourable change for taxpayers.