Jurisdiction(s):
United Kingdom

Key definition

Tax covenant definition

What does Tax covenant mean? In UK and Irish share sales, a tax covenant is the seller’s contractual undertaking to reimburse the buyer for specified tax liabilities of the target company or group that relate to periods before completion or pre-completion events (for example, corporation tax, VAT or PAYE). It does not require the seller to pay the tax authority; instead it obliges the seller to pay the buyer an amount equal to the liability (often including interest, penalties and costs), thereby shifting historic tax risk to the seller. The expression is a transactional term rather than a statutory definition; it is...

Tax covenants in UK share sales: purpose, allocation of pre-completion liabilities, HMRC extra-statutory concession, gross-up clauses, procedures, and interaction with SPAs and tax warranties

Published by a LexisNexis Tax expert

Practice notes

It is market practice for a tax covenant, sometimes referred to as a tax deed, to be included within the transaction documents for a sale of the entire share capital of a company (the target), where the target is:

a private company incorporated in the UK; or
a private company incorporated outside the UK with a UK connection (ie, where the buyer is UK tax resident or the share purchase agreement (SPA) is to be governed by English law)

This Practice Note sets out:

what a tax covenant is
what a tax covenant does—broadly, it allocates, by reference to a specified date, responsibility between seller and buyer for the tax liabilities of a target company or group; and
how sums paid under a tax covenant are treated for UK tax purposes

What is a tax covenant?

Parties to the covenant

A tax covenant is an agreement between the seller and the buyer, and not between the seller and the target company...

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Web page updated on 21/05/2026

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