»Ê¹ÚÌåÓýapp

Background

Where a taxpayer transfers an asset otherwise than by way of a bargain made at arm’s length TCGA92/S17 treats them as having sold the asset at market value, see CG14530+. »Ê¹ÚÌåÓýapp transferee is also treated as having acquired the asset at market value. If the transfer is at undervalue the transferee will have a Capital Gains Tax base cost which is higher than the amount they actually paid for the asset. Such transfers are only likely to occur between connected persons. »Ê¹ÚÌåÓýapp transferor is unlikely to be willing to suffer a chargeable gain or forego a capital loss to give a third party a tax benefit.

When a transfer at undervalue is made by a company that will also reduce the value of the company’s shares. If a company with assets worth £100,000 sells them for £20,000 the value of the entire company will be reduced by £80,000. »Ê¹ÚÌåÓýapp value of a seventy five percent shareholding may be reduced by £60,000.

»Ê¹ÚÌåÓýapp basic rule

TCGA92/S125 restricts the allowable cost of shares if a close company has transfers assets at undervalue in a bargain made otherwise than at arm’s length. »Ê¹ÚÌåÓýapp acquisition cost of the shares is simply reduced by the “undervalueâ€�: the difference between the market value of the asset and any consideration paid for it. »Ê¹ÚÌåÓýapp adjustment is apportioned between the shareholders in a company on a pro rata basis. If the apportioned undervalue is greater than a shareholder’s acquisition cost then their acquisition cost is reduced to nil.

Example

• Mrs Holland bought 1,000 out of the 10,000 issued shares in Happy Holidays Ltd, a close company, for £50,000.
• Happy Holidays Ltd sold a caravan site with a market value of £1,000,000 to a connected person at a price of £800,000.
• Mrs Holland subsequently sold her 1,000 shares.

»Ê¹ÚÌåÓýapp transfer was made at an undervalue of £200,000. Mrs Holland owned 10% of the shares so £20,000 is apportioned to her and the CGT base cost of her holding is reduced to £30,000.

Where the rule does not apply

»Ê¹ÚÌåÓýapp rule does not apply to transfers â€�

• between companies in that same group to which TCGA92/S171 applies no gain/no loss treatment,
• that are treated as an income or capital distribution, or
• that are treated as employment income.

TCGA92/S125(4).

Where the shareholder itself is a close company

Where a shareholder in the company making the transfer at undervalue is also a company then the value of both companies will be have been reduced by the transfer. »Ê¹ÚÌåÓýapprefore the amount of undervalue is also apportioned between the shares in any close company which is a shareholder. TCGA92/S125(3).

Example

• Assume the facts in the example above are the same except that Mrs Holland is a close company, Holland Ltd and that Mr France had acquired 500 out of 1,000 shares in Holland Ltd for £70,000.
• Mr France subsequently sold his 500 shares.

»Ê¹ÚÌåÓýapp transfer at undervalue apportioned to the Holland Ltd shares was £20,000, as above. Mr France owned 50% of the shares so £10,000 is apportioned to him and the base cost of his holding is reduced to £60,000.

Modification for transfers to an employee trust.

If the asset is transferred to an employee trust TCGA92/S239(3) modifies the restriction. »Ê¹ÚÌåÓýapp figure to be apportioned amongst the shareholders is the lower of the difference between the consideration paid by the trust and

• the company’s allowable acquisition costs or
• the market value of the asset.

Guidance on employee trusts is at CG36000+.

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