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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Transfers not at arm’s length and connected persons rules: SP D12

The effect of TCGA92/S17 and TCGA92/S18 is to treat transactions between connected persons or transactions between parties acting otherwise than at arm’s length as taking place at market value. Guidance on transactions between connected persons is given at CG14580+ and on transactions other than by way of a bargain made at arm’s length at CG14540+.

TCGA92/S286 (4) provides that partners are connected persons except where the transaction relates to an acquisition or disposal of a partnership asset pursuant to a genuine commercial arrangement. This means that the market value rule will not apply to transactions in partnership assets which are carried out under genuine commercial arrangements and in which the partners are acting purely at arm’s length.

Similarly, the market value rule will not apply to changes in partnership sharing ratios occurring on the admission of a new partner who is not connected with the existing partners provided that the transaction is carried out under genuine commercial arrangements and the partners, including the incoming partner, are acting purely at arm’s length.

The market value rule will apply to transfers of fractional interests in partnership assets between partners who

  • are otherwise connected with each other, for example, if they are connected by a family relationship such as father and son; or
  • are acting other than at arm’s length, for example, where no consideration is given or the consideration given is less than market value.

However, paragraph 7 of SP D12 explains that the market value rule will not be applied where no consideration or consideration less than market value passes between the partners, including incoming partners, provided that:

  • no consideration would have been paid had the parties been acting at arm’s length, or
  • the consideration actually paid is not less than that which would have been paid by parties acting at arm’s length.