CG65750 - Transfer of a business to a company: example: consideration wholly in shares
The basic mechanics of incorporation relief in a straightforward case are illustrated in the example below.
A transferred his business with all its assets to X Ltd in consideration for an issue of 8,000 shares in X Ltd. Liabilities in the sum of £15,000 were transferred with the business.
The balance sheet of the business was as follows:
| £ | £ | ||
|---|---|---|---|
| Business assets: | |||
| Capital & Reserves | 70,000 | non-chargeable | 49,000 |
| Creditors | 15,000 | chargeable (at cost) | 23,000 |
| cash | 13,000 | ||
| 85,000 | 85,000 |
It was agreed in the course of the negotiations that the current market values of the assets of the business were:
| non-chargeable assets | £55,000 |
|---|---|
| chargeable assets | £50,000 |
and these values were adopted for the purpose of determining the consideration payable to A.
Gains on the transfer of chargeable assets:
| £ | |
|---|---|
| Market value on transfer | 50,000 |
| Less Cost | 23,000 |
| 27,000 |
The whole of the consideration received by the transferor in exchange for the business was 8,000 shares in X Ltd.
The value of the shares was £103,000:
| £ | |
|---|---|
| Non-chargeable business assets | 55,000 |
| Chargeable business assets | 50,000 |
| Cash | 13,000 |
| 118,000 | |
| Less creditors | 15,000 |
| Value of consideration | 103,000 |
Proportion of aggregate net gains appropriate to the consideration in shares:
| Gains | £27,000 x | 103,000(A) | = £27,000 |
|---|---|---|---|
| 103,000 (B) |
The base cost of the shares to be used on the occasion of their disposal is £76,000 (£103,000 - £27,000).