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HMRC internal manual

Capital Gains Manual

Transfer of a business to a company: example: consideration partly satisfied by sum credited to director’s loan account

A transfers his business to A Ltd, a company in which he holds 2 shares which he acquired for a cash consideration of £2.

A Ltd issues 98 shares to A in part consideration for the transfer of the business. The rest of the consideration is satisfied by the conversion of A’s capital account balance into a director’s loan account.

The balance sheet of the business at the date of transfer of the business is as follows:

  £   £
Capital account 26,000 Freehold property 14,000
Creditors 12,000 Goodwill 2,000
    Non-chargeable assets  
    including cash 22,000
  38,000   38,000

The following values were agreed as representing the current market values of the assets at the time of the transfer so that the total value of the business transferred to A Ltd was £60,000:

Non-chargeable assets 22,000
Property 37,000
Goodwill 13,000
Less creditors 12,000
Net values of assets transferred 60,000

Gains on transfer of chargeable assets:

  £ £
Property 37,000  
Less Cost 14,000  
Gain   23,000
Goodwill 13,000  
Less Cost 2,000  
Gain   11,000
Aggregate net gains   34,000

The consideration received by A for the transfer of the business was 98 shares in A Ltd plus the value of sum credited to his director’s loan account, £26,000. The total consideration is equal to the value of the business transferred, £60,000.

The value of the 98 shares in A Ltd is therefore (£60,000 - £26,000) £34,000.

Proportion of aggregate net gains appropriate to consideration in shares:

£34,000 x 34,000 (B) = £19,267

This amount is to be deducted from the cost of the 98 shares in A Ltd. The revised cost is therefore £14,733 (£34,000 - £19,267).

The balance of aggregate net gains, (£34,000 - £19,267) £14,733 is chargeable in the tax year in which the transfer took place.