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|
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:
|Net values of assets transferred||60,000|
Gains on transfer of chargeable assets:
|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.