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HMRC internal manual

Capital Gains Manual

Close companies: transfers at undervalue: effect of TCGA92 S125

TCGA92/S125TCGA92/S125 restricts the advantage a shareholder may have gained if a close company transfers assets at undervalue in a bargain made otherwise than at arm’s length. The acquisition cost of their shares is reduced by an appropriate proportion of the difference between the market value of the asset and any consideration paid for it. The appropriate proportion is calculated by allocating the difference between the shareholders on a pro rata basis. If the apportioned undervalue is greater than the shareholder’s acquisition cost their acquisition cost is reduced to nil.


  • March 1986 Mrs Holland buys 1,000 out of the 10,000 issued shares in Happy Holidays Ltd, a close company, for £50,000.
  • September 1988 Happy Holidays Ltd sells a caravan site with a market value of £500,000 to a connected person at a price of £400,000.
  • December 1990 Mrs Holland sells her 1,000 shares for £230,000.

CAPITAL GAINS TAX COMPUTATIONThe acquisition cost of Mrs Holland’s shares is reduced by a proportionate part of the transfer at undervalue. Mrs Holland owns 1,000 out of the 10,000 issued shares.

Market value . £500,000      
less consideration paid . £400,000      
difference   £100,000 x 1,000 =   £10,000
Acquisition cost   £50,000- £10,000  = £40,000    
    No of    
shares Pool of qualifying expenditure Pool of indexed expenditure    
01/03/1986   1000 £40,000 £40,000

March 1986-

December 1990 0.346       £13,840  
      1000 £40,000 £53,840
    Disposal proceeds   230000
  LESS Cost     40000
      Unindexed gain   190000
  LESS Indexation     13840
      CHARGEABLE GAIN   176,160

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.