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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Distributions: general: transfer of assets and liabilities by/to members

CTA10/S1000 (1) B and S1000 (1) G

CTA10/S1020

Where a company transfers an asset to one of its members (or vice versa) CTA10/S1000 (1) G may apply. The circumstances are set out at CTA10/S1020. The amount of the distribution is:

  • the market value of the asset or benefit received by the member,

less

  • the market value of any new consideration (see CTM15140) the member has given for the asset or benefit.

Similarly, if a member transfers a liability to the company, the distribution to the member is:

  • the amount of the liability transferred to the company,

less

  • any new consideration the member has given for the transfer of the liability.

However, where the transfer is in respect of shares, CTA10/S1000 (1) B may also apply. For distributions made on or after 17 July 2012, the overlap in the scope of sections 1000 (1) B and G is removed by CTA10/S1020 (2A) so that a distribution will only fall within S1000 (1) G if it does not fall within S1000 (1) B (or would fall within S1000 (1) B if the exclusion for the repayment of capital on the shares was disregarded) - FA12/S33.

For distributions made before 17 July 2012, the following were generally not distributions:

  • transfers of assets between group companies, and
  • transfers of assets between resident companies not under common control CTM15300.

The above exclusions were removed for distributions made after 17 July 2012 also by FA12/S33.

The question whether CTA10/S1000 (1) B or G applies should be considered whenever a company transfers an asset to a member. The employment income position should also be considered where the member is an employee or director, see CTM15290.

The Noved case

The legislation relating to transfer of assets (then ICTA88/S209 (2) (b) and (4)) was considered by the Special Commissioners in Noved Investment Co v HMRC [2006] UKSPC 521. It was found that:

  • the transfer of assets at undervalue was capable of falling within both ICTA88/S209 (2) (b) and (4),
  • cash transfers were within both ICTA88/S209 (2) (b) and (4).

The Commissioners also found that ICT88/S209 (4):

  • can apply to unilateral transactions in addition to bilateral transactions,
  • is not a sweep up provision, and is complementary in certain respects to ICTA88/S209 (2) (b),
  • can include a transfer of cash, whether by the company to its member or by the member to the company,
  • can apply when the transfer is only to one member, and
  • covers transfers by or to a member.

A transfer to a past member, or to someone else at a member’s direction, is not covered. It is then necessary to consider ICTA88/S209 (2) (b).

However, as noted above, the overlap between the scope of ICTA88/S209 (2)(b) and ICTA88/S209 (4) (now CTA10/S1000 (1) B and G) was removed by FA12/S33.

Avoidance issues

CTA10/S1000 (1) G is written in terms of a transfer between a company and its members. CTA10/S1000 (1) B (see CTM15350) may be appropriate in circumstances where the transfer is between a company and an associate of a member (and in any case takes precedence for distributions in respect of shares on or after 17 July 2012).

Property values may differ markedly according to the terms of interest held. Consider the case where a company transfers a freehold interest in a property to a member in circumstances where the property is subject to a tenancy held by the member. The market value of the tenancy should be taken into account when valuing the freehold interest. In contrast, however, consider the situation where a company grants a lease on a freehold property to a member at market value and then sells the encumbered freehold interest to the member at market value. As a result of these two transactions the member will hold the unencumbered freehold interest but the value of unencumbered freehold will exceed the sum of the market values of the leasehold interest and the encumbered freehold interest. In those circumstances the value of the distribution is based on the market value of the unencumbered freehold interest.

Another company may grant a member an option to buy an asset, such as a house. The price for the house is set when the company grants the option. When the member exercises the option the price the member pays for the company’s asset may be less than the current open market value. It may be contended that the member has given the value of the option as additional consideration for the asset and that no distribution arises. However, since the member has received value from the company in excess of the new consideration given, the full amount of the benefit received by the member should be treated as a distribution by the company.

Assistance of District Valuer Services

District Valuer Services may need to advise on the valuation of an asset-giving rise to a distribution CTM15330.