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HMRC internal manual

Capital Gains Manual

Transactions between connected persons: subject to right/restriction

TCGA92/S18 (6) & TCGA92/S18 (7)

The basic rule applied by TCGA92/S17 and TCGA92/S18 is that transactions between connected persons involving both an acquisition and a disposal are deemed to take place at market value. The computation of the market value of the asset is modified by subsections 18(6) and (7) where the asset is subject to a right or restriction which is:

  • enforceable by the person making the disposal, or
  • enforceable by a person connected with the person making the disposal.

An example of such a right would be a restrictive covenant.

These subsections do not apply to:

  • a lease of land or other property, or
  • a right or restriction under a mortgage or other charge.

TCGA92/S18 (6) & TCGA92/S18 (7)

When Section 18(6) applies the market value is calculated as follows:

  • Ascertain the market value of the asset without the right or restriction.
  • Subtract the smaller of:

    • the market value of the right or restriction, or
    • the amount by which the removal of the right or restriction would increase the value of the asset.

This method is not applied and the full market value (without any adjustment for the right or restriction) is used in the following circumstances:

  • when enforcement of the right or restriction would destroy or substantially impair the value of the asset, and
  • this would bring no advantage to the person making the disposal or any person connected with him or her, or
  • when the right is an option or other right to acquire the asset, or
  • in the case of incorporeal property when the right could extinguish the asset by merger or forfeiture or otherwise.