CG65755 - Transfer of a business to a company: example: consideration partly in shares
A transferred his business with all its assets except cash to X Ltd in consideration for an issue of 1,500 shares in X Ltd plus £108,000 in cash. Liabilities in the sum of £32,500 were transferred with the business.
The balance sheet of the business at the date of transfer was:
| - | £ | - | £ |
|---|---|---|---|
| Capital and Reserves | 69,500 | Non-chargeable business assets | 35,200 |
| Creditors | 32,500 | Chargeable assets (at cost) | - |
| - | - | Goodwill | 11,200 |
| - | - | Freehold Premises | 43,600 |
| - | - | Cash | 12,000 |
| - | 102,000 | - | 102,000 |
In the course of negotiations before the transfer to the company, the following values were agreed as representing the current market values of the assets:
| - | £ |
|---|---|
| Non-chargeable assets | 40,000 |
| Goodwill | 35,000 |
| Premises | 75,000 |
| - | 150,000 |
| Creditors | 32,500 |
| Net values of assets transferred | 117,500 |
Computation of chargeable gains on assets:
| - | £ | £ |
|---|---|---|
| Goodwill | 35,000 | - |
| Less Cost | 11,200 | - |
| Gain | - | 23,800 |
| Premises | 75,000 | - |
| Less Cost | 43,600 | - |
| Gain | - | 31,400 |
| Aggregate net gains | - | 55,200 |
The consideration received by the transferor for the transfer of the business was 1,500 shares in X Ltd plus cash of £108,000. The total value of the consideration was the value of the business transferred, £117,500. Therefore, the value of the 1,500 shares is £9,500 as follows:
| - | £ |
|---|---|
| Total value of the business | 117,500 |
| Consideration other than shares received by the transferor | 108,000 |
| Value of the 1,500 shares in X Ltd | 9,500 |
Proportion of aggregate net gains appropriate to the consideration in shares:
| - | - | - | Amount |
|---|---|---|---|
| Gains | £55,200 x | 9,500 (A) | = £4,463 |
| - | - | 117,500 | - |
This amount is to be deducted from the cost of the shares. The cost figure for the shares to be used on the occasion of any future disposal is therefore £5,037 (£9,500 - £4,463).
The proportion of the aggregate net gains appropriate to the consideration in cash, (£55,200 - £4,463) £50,737, remains chargeable in the tax year in which the transfer took place.