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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Consideration for disposal: market value rule: share subscriptions

Transactions between a company and its controlling shareholders may also be otherwise than by way of a bargain made at arm’s length when the gratuitous benefit of the transaction is in the company’s favour.


Company A is controlled by two people X and Y who each own 40 per cent of the issued share capital. Company A has not been trading profitably and has borrowed £100,000 from X and £50,000 from Y. Company T makes an offer to buy Company A for £3,000 on condition that it does not have any outstanding borrowings.

Company A then issues 150 shares, 100 to X for £100,000 and 50 to Y for £50,000. Company A uses the money it receives for the shares to pay back its debts. The shareholders then sell all their shares to Company T and X and Y each claim a loss on the disposal of their shares.

The purchases of the 150 shares in Company A were otherwise than by way of bargains made at arm’s length as X and Y purchased the shares for 150,000 knowing that they were not worth that much. They conferred a gratuitous benefit on Company A by purchasing its shares at overvalue. X and Y must each use the market value of their new shares at the date of issue as their acquisition cost.