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HMRC internal manual

Capital Gains Manual

Transactions between connected persons: limitation to operation of S18

It is important to notice that TCGA92/S18 operates only where the transaction involves BOTH an acquisition and a disposal. A transaction by way of sale or gift will involve both an acquisition and a disposal: the purchaser or donee acquires the asset, the vendor or donor disposes of the asset. The most common example of a transaction which does not involve both is the issue of shares by a company: the shareholders acquire shares but the ISSUE of shares by the company is not a disposal. Another example is the purchase by a company of its own shares.

A company may issue further shares to its controlling shareholder. They are connected persons but Section 18 does not apply, because the company has not made a disposal. The market value rule will apply in such circumstances ONLY IF you can demonstrate that the acquisition of shares was otherwise than by way of bargain at arm’s length. Section 17 would then apply directly, without the operation of Section 18.