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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Market value rule: acquisition no disposal: disposal no acquisition


The market value rule in TCGA92/S17 can apply to a transaction otherwise than by way of a bargain made at arm’s length where there is an acquisition of an asset but no corresponding disposal or where there is a disposal but no acquisition. If a company issues its own shares there is no chargeable disposal by the company but a person acquires the shares. When a debt is repaid there is a disposal of the debt but no acquisition. Section 17 can apply in these circumstances.

Where there is an acquisition but no corresponding disposal the market value rule is disapplied by subsection 17(2) if there is no consideration in money or money’s worth or the consideration is of an amount lower than the market value of the asset. The effect of the legislation is that if the consideration paid is higher than the market value the deemed consideration is market value but if the consideration paid is less than market value the actual amount paid forms the consideration.

The case of Harrison v Nairn Williamson Ltd (51TC135) established that Section 17 applied when there was an acquisition of an asset with no disposal. In this case a company issued its own shares. The Nairn Williamson decision worked in the Revenue’s favour because the market value of the shares acquired in that case was less than the actual consideration given for them. The actual cost was thus reduced and the capital loss on their subsequent disposal was diminished. Following this decision the market value rule was frequently manipulated to a taxpayer’s advantage. Subsection 17(2) was then introduced to restrict the operation of what is now TCGA92/S17 in respect of acquisitions not matched by a corresponding disposal. If the market value figure was always used instead of the actual consideration the taxpayer would receive a larger cost figure than the amount actually paid when the market value was greater than the actual consideration.

To summarise, where there is an acquisition but no corresponding disposal, you use the SMALLER of the actual consideration or market value.

If you believe that a transaction has been carried out otherwise than by way of a bargain made at arm’s length it may be worthwhile to ask for an informal valuation of the asset or assets in question in order to decide whether the point will be material.

Only ask for a FORMAL valuation when you have agreed with the taxpayer or agent that a valuation is necessary.