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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
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Consideration for disposal: market value rule: apply to each transaction

The subjective intention test has to be applied to each individual transaction. If the terms of a transaction have been influenced by any other transaction or arrangement between the persons entering into the transaction then the parties may not be trying to reach the best possible deal from THAT PARTICULAR TRANSACTION. In these circumstances it is likely that one of the parties will have intended to confer a gratuitous benefit on the other as a result of that particular transaction, even if the larger, overall deal is not intended to do this. That particular transaction will be ‘otherwise than by way of a bargain made at arm’s length’. The other transactions within the wider deal would also have to be examined to see whether they passed the subjective intention test.

  • EXAMPLE

Mr B owns a house with a walled garden and five adjacent fields. A developer wishes to buy all the property, demolish the house and build a sports centre and mini golf course. The market value of the house and garden is £100,000 and of the fields is £50,000. Mr B agrees to sell the fields for £10,000 on condition the developer buys the house for £140,000 (Mr B will qualify for private residence relief). There are two separate transactions, the sale of the house and the sale of the fields.

Mr B gives a gratuitous benefit to the developer when he sells the fields for £10,000 because he knows they are worth more than this. Accordingly the transaction is ‘otherwise than by way of a bargain made at arm’s length’ and the market value should be substituted.

The developer gives a gratuitous benefit to Mr B when he buys the house for £140,000 because it is not worth this much. Accordingly this transaction is ‘otherwise than by way of a bargain made at arm’s length’ and the market value of the house should be substituted.