CG65750 - Reliefs: Incorporation relief: example: consideration wholly in shares
All statutory references in this page are to the Taxation of Chargeable Gains Act 1992 unless otherwise specified.
The basic mechanics of section 162 incorporation relief in a straightforward case are illustrated in the example below. The example assumes Extra Statutory Concession (ESC) D32 applies.
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 at the date of transfer was as follows:
This table shows a simple balance sheet. On the left: Capital and reserves, £70,000 plus Creditors, £15,000, totalling £85,000. On the right, Business assets listed as: Non chargeable, £49,000, plus chargeable (at cost) £23,000, plus cash 13,000, also totalling £85,000.
- | £ | 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.
1. Gains on the transfer of chargeable assets:
This table shows the gain calculation. Market value on transfer, £50,000, less cost, £23,000, gives Aggregate net gains, £27,000.
- | £ |
|---|---|
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:
This table shows the calculation of net value of business transferred.
Non-chargeable business assets, £55,000, plus Chargeable business assets,£50,000, plus Cash, £13,000 gives Total assets transferred, £118,000.
Total assets transferred £118,000 less creditors, £15,000 gives Net value of business transferred (B), £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 |
2. Proportion of aggregate net gains appropriate to the consideration in shares is the gain multiplied by the fraction of A divided by B:
£27,000 × (103,000 ÷ 103,000) = £27,000
This amount is to be deducted from the cost of the shares. The base cost of the shares to be used on the occasion of their disposal is £103,000 - £27,000 = £76,000.
3. The balance of aggregate net gains is nil, the gain is relieved in full.