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HMRC internal manual

Capital Gains Manual

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Transfer of a business to a company: election for relief under TCGA92/S162 not to apply

TCGA92/S162A

Relief under TCGA92/S162 is automatic but where a business is transferred to a company on or after 6 April 2002 the person making the transfer can make an election under TCGA92/S162A to prevent the relief from applying.

If a business was owned by more than one person immediately before it was transferred, for example a business carried on in partnership, each person has a separate entitlement to make an election,TCGA92/S162A (7)(a). Such an election applies only to the gains arising to that person on the transfer of the assets of the business and to the shares issued to him or her in exchange, TCGA92/S162A (7)(b).

TCGA92/S162A (9)

References in TCGA92/S162A to “new assets” include any shares or debentures that are treated as the same assets as the new assets under TCGA92/S127, see CG51805.

Form of election and time limit

An election must be made by notice given to an officer of the Board no later than the ‘relevant date’, TCGA92/S162A (2). The rules for determining the ‘relevant date’ are given in TCGA92/S162A (3) and (4).

TCGA92/S162A (3)

The relevant date will be the second anniversary of the 31st January next following the year of assessment in which the transfer took place except in situations where TCGA92/S162A (4) applies, see below.

Example

A transfers his business together with the whole of its assets in exchange for an issue of shares in X Ltd on 1 October 2006. As the transfer occurred in 2006/07 A can make an election under TCGA92/S162A no later than 31 January 2010.

TCGA92/S162A (4)

If the transferor disposes of the shares issued in exchange for the business (or any shares or debentures which are treated under TCGA92/S127 as the same asset as those shares) prior to the end of the year of assessment following the one in which the transfer took place the relevant date will be the first anniversary of the 31st January next following the year of assessment in which the transfer took place.

Special rules apply where the shares were disposed of to the transferor’s spouse or civil partner, see below.

Example

A transfers his business together with all its assets to X Ltd in exchange for an issue of shares in X Ltd on 1 October 2006. A sells his entire shareholding in X Ltd on 1 March 2008.

As the transfer of the business occurred during 2006/07 and the disposal of the shares took place before the end of the following year of assessment A can make an election under TCGA92/S162A no later than 31 January 2009.

TCGA92/S162A (5) - transfers between husband and wife or between civil partners

TCGA92/S162A (5)(a) provides that a disposal of shares (or any shares or debentures which are treated under TCGA92/S127 as the same asset as those shares) by the transferor of the business to a spouse or civil partner to which TCGA92/S58 (1), see CG10790, applies is disregarded for the purposes of TCGA92/S162A (4). But, a subsequent disposal of the shares by the spouse or civil partner (other than a disposal back to the original transferor of the business) will be regarded as a disposal by the person who transferred the business to the company for the purposes of determining the relevant date, TCGA92/S162A (5)(b).

Example 1

A transfers his business together with all of its assets in exchange for an issue of shares in X Ltd on 1 October 2006. A gives all of his shares to his wife with whom he lives on 1 March 2008. TCGA92/S58 applies to treat the disposal to Mrs A as resulting in neither a gain nor a loss. Mrs A sells the shares in X Ltd to a third party on 31 March 2008.

A decides to make an election under TCGA/S162A to prevent relief under TCGA92/S162 from applying in relation to the transfer of the business to the company.

For the purposes of determining the relevant date in relation to A TCGA92/S162A (5) applies so that the disposal of the shares by A to Mrs A is disregarded and the subsequent disposal of the shares by Mrs A to a third party is regarded as a disposal by A.

The transfer of the business by A occurred during 2006/07 and the disposal of the shares by Mrs A took place before the end of the following year of assessment. Therefore, A can make an election under TCGA92/S162A in relation to the transfer of the business on 1 October 2006 no later than 31 January 2009.

Example 2

A transfers his business together with all of its assets in exchange for an issue of shares in X Ltd on 1 October 2006. A gives all of his shares to his wife with whom he lives on 1 March 2008. TCGA92/S58 applies to treat the disposal to Mrs A as resulting in neither a gain nor a loss. Mrs A continues to hold the shares after 5 April 2008.

A decides to make an election under TCGA/S162A to prevent relief under TCGA92/S162 from applying in relation to the transfer of the business to the company.

For the purposes of determining the relevant date in relation to A TCGA92/S162A (5)(a) applies so that the disposal of the shares by A to Mrs A is disregarded. As Mrs A continues to hold the shares after the end of the year of assessment following the one in which the transfer of the business took place the relevant date for A will be 31 January 2010.