Earnout arrangements are typically used to either deal with uncertainty in value, or as a way of giving the seller ‘skin in the game’ for the post-sale period. Under a typical earnout arrangement, the buyer will pay an initial lump sum amount upfront, however further payments after the sale is completed will depend on the future performance of the business.
Where the arrangement was entered into on or after 24 April 2015, qualifying earnouts will be taxed under ‘look through rules’. Under the look-through rules capital gains/losses from the look-through earnout right are disregarded and are instead treated as attributable to the disposal of the underlying asset. Tax laws regarding earn outs are complex. We recommend seeking specialist tax advice when structuring these arrangements.