HMRC internal manual

Capital Gains Manual

CG57102 - Close companies: transfers at undervalue


Where a taxpayer transfers an asset otherwise than by way of a bargain made at arm’s length TCGA92/S17 treats them as having sold the asset at market value, see CG14530+. The transferee is also treated as having acquired the asset at market value. If the transfer is at undervalue the transferee will have a Capital Gains Tax base cost which is higher than the amount they actually paid for the asset. Such transfers are only likely to occur between connected persons. The transferor is unlikely to be willing to suffer a chargeable gain or forego a capital loss to give a third party a tax benefit.

When a transfer at undervalue is made by a company that will also reduce the value of the company’s shares. If a company with assets worth £100,000 sells them for £20,000 the value of the entire company will be reduced by £80,000. The value of a seventy five percent shareholding may be reduced by £60,000.

The basic rule

TCGA92/S125 restricts the allowable cost of shares if a close company has transfers assets at undervalue in a bargain made otherwise than at arm’s length. The acquisition cost of the shares is simply reduced by the “undervalue”: the difference between the market value of the asset and any consideration paid for it. The adjustment is apportioned between the shareholders in a company on a pro rata basis. If the apportioned undervalue is greater than a shareholder’s acquisition cost then their acquisition cost is reduced to nil.


  • Mrs Holland bought 1,000 out of the 10,000 issued shares in Happy Holidays Ltd, a close company, for £50,000.
  • Happy Holidays Ltd sold a caravan site with a market value of £1,000,000 to a connected person at a price of £800,000.
  • Mrs Holland subsequently sold her 1,000 shares.

The transfer was made at an undervalue of £200,000. Mrs Holland owned 10% of the shares so £20,000 is apportioned to her and the CGT base cost of her holding is reduced to £30,000.

Where the rule does not apply

The rule does not apply to transfers –

  • between companies in that same group to which TCGA92/S171 applies no gain/no loss treatment,
  • that are treated as an income or capital distribution, or
  • that are treated as employment income.


Where the shareholder itself is a close company

Where a shareholder in the company making the transfer at undervalue is also a company then the value of both companies will be have been reduced by the transfer. Therefore the amount of undervalue is also apportioned between the shares in any close company which is a shareholder. TCGA92/S125(3).


  • Assume the facts in the example above are the same except that Mrs Holland is a close company, Holland Ltd and that Mr France had acquired 500 out of 1,000 shares in Holland Ltd for £70,000.
  • Mr France subsequently sold his 500 shares.

The transfer at undervalue apportioned to the Holland Ltd shares was £20,000, as above. Mr France owned 50% of the shares so £10,000 is apportioned to him and the base cost of his holding is reduced to £60,000.

Modification for transfers to an employee trust.

If the asset is transferred to an employee trust TCGA92/S239(3) modifies the restriction. The figure to be apportioned amongst the shareholders is the lower of the difference between the consideration paid by the trust and

  • the company’s allowable acquisition costs or
  • the market value of the asset.

Guidance on employee trusts is at CG36000+.