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HMRC internal manual

Capital Gains Manual

Consideration for disposal: market value rule: control

Where one of the parties to a transaction is controlled by another person the controlled party may confer a gratuitous benefit on the other party to the transaction on the directions of the controlling person. The controlling person need not be a party to the particular transaction. But if they have exercised control so that the intention of the controlled person is to confer a gratuitous benefit by the transaction then it will have been carried out otherwise than by way of a bargain made at arm’s length. For example the parent company of a group may have negotiated an overall deal to sell part of the group’s business to an unconnected third party. As part of the deal one of the subsidiary companies sells two brand names at undervalue to the third party. In that particular transaction the intention of the subsidiary company was to confer a gratuitous benefit on the third party, because it was directed to do so by its parent company.

Transactions between a company and its controlling shareholders may or may not be bargains made at arm’s length. Where there is both an acquisition and a disposal the connected persons rules apply. Otherwise the subjective intention test must be applied.