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HMRC internal manual

Capital Gains Manual

Transfer of a business to a company: example: consideration partly in shares

A transferred his business with all its assets except cash to X Ltd in consideration for an issue of 1,500 shares in X Ltd plus £108,000 in cash. Liabilities in the sum of £32,500 were transferred with the business.

The balance sheet of the business at the date of transfer was:

  £   £
Capital and Reserves 69,500 Non-chargeable business assets 35,200
Creditors 32,500 Chargeable assets (at cost)  
    Goodwill 11,200
    Freehold Premises 43,600
    Cash 12,000
  102,000   102,000

In the course of negotiations before the transfer to the company, the following values were agreed as representing the current market values of the assets:

Non-chargeable assets 40,000
Goodwill 35,000
Premises 75,000
Creditors 32,500
Net values of assets transferred 117,500

Computation of chargeable gains on assets:

  £ £
Goodwill 35,000  
Less Cost 11,200  
Gain   23,800
Premises 75,000  
Less Cost 43,600  
Gain   31,400
Aggregate net gains   55,200

The consideration received by the transferor for the transfer of the business was 1,500 shares in X Ltd plus cash of £108,000. The total value of the consideration was the value of the business transferred, £117,500. Therefore, the value of the 1.500 shares is £9,500 as follows:

Total value of the business 117,500
Consideration other than shares received by the transferor 108,000
Value of the 1,500 shares in X Ltd 9,500

Proportion of aggregate net gains appropriate to the consideration in shares:

Gains £55,200 x 9,500 (A) = £4,463

This amount is to be deducted from the cost of the shares. The cost figure for the shares to be used on the occasion of any future disposal is therefore £5,037 (£9,500 - £4,463).

The proportion of the aggregate net gains appropriate to the consideration in cash, (£55,200 - £4,463) £50,737, remains chargeable in the tax year in which the transfer took place.