CG12701 - Disposal of assets: simple disposals: exchanges of assets
The exchange of one asset for another is a chargeable occasion for both parties involved.
There are, however, special rules which apply in cases involving
- the conversion of securities, see CG55000+
- certain exchanges of shares or debentures, see CG52521+
- the transfer of a business to a company in exchange for shares, see CG65700+
- the exchange of joint interests in land, see CG73000+.
Transactions otherwise than by way of a bargain made at arm’s length
Where assets have been exchanged in transactions otherwise than by way of a bargain made at arm's length, the disposal proceeds are taken as the market value, at the date of exchange, of the asset disposed of, see s17(1) and CG14480P.
Example 1
In June 2022, X acquired a piece of jewellery for £5,000 and in June 2023 his brother Y acquired a painting for £4,000. In July 2024 when the piece of jewellery had a market value of £8,000 and the painting a market value of £8,500 the two articles were exchanged.
As X and Y are connected persons the disposal proceeds are the market values, at the date of exchange, of the assets exchanged,.
Disposal of jewellery by X
|
£ |
|
|
Disposal proceeds |
8,000 |
|
Less cost |
5,000 |
|
Equals chargeable gain |
3,000 |
Disposal of painting by Y
|
Value of painting at date of exchange |
£ |
|
Disposal proceeds |
8,500 |
|
Less cost |
4,000 |
|
Equals chargeable gain |
4,500 |
The cost of the new acquisition in each case is the market value of the asset at the date of exchange, see 17(1)(a). Therefore X’s acquisition of the painting in June 2023 for its market value of £8,500 and Y’s acquisition of the jewellery for its market value of £8,000.
Transactions by way of a bargain made at arm’s length
In a transaction by way of a bargain made at arm’s length, the disposal proceeds are the market value of the asset received. The market value of the assets at the date of exchange would be expected to be the same and, if not, the parties to the exchange would make any necessary cash adjustment for any difference in the value of the assets. This represents additional consideration in the hands of the person who receives it.
Where necessary, valuations for both taxpayers who have exchanged assets should be considered together. Any values agreed as the disposal proceeds or acquisition costs for assets which have been exchanged, will also be the disposal proceeds, or acquisition costs, for any claim to roll-over relief, see CG60250+ and, in particular, CG60280.
A valuation will not normally be necessary where an asset is acquired by a company in an exchange at arm’s length for an issue of its own shares and the price at which those shares are to be allotted is specified in the contract, see Stanton v Drayton Commercial Investment Co Ltd 55TC286. You can accept the contract price in such cases, although you should make a submission to the Capital Gains Technical team, see CG99998 in any case where there is a long delay between the making of the contract and the issuing of the shares.
Example 2
In June 2022, X acquired a piece of jewellery for £5,000 and in June 2023 his Y acquired a painting for £4,000. They are unconnected persons. In July 2024 when the piece of jewellery had a market value of £8,000 and the painting a market value of £8,500 the two articles were exchanged. A cash adjustment was made equal to the difference in the values so that X paid £500 to Y.
Disposal of jewellery by X
|
Value of painting at date of exchange less cash adjustment paid by X to Y |
£ |
|
Disposal proceeds |
8,000 |
|
Less cost |
5,000 |
|
Equals chargeable gain |
3,000 |
Disposal of painting by Y
|
Value of jewellery at date of exchange plus cash adjustment received by Y from X |
£ |
|
Disposal proceeds (£8,000 + £500) |
8,500 |
|
Less cost |
4,000 |
|
Equals chargeable gain |
4,500 |
The cost of the new acquisitions in each case is the value of the consideration given, see s38(1)(a).
Acquisition cost of painting by X
Consideration given = value of jewellery at date of exchange (£8,000) plus cash payment to Y (£500) = £8,500.
Acquisition cost of jewellery by Y
Consideration given = value of painting at date of exchange (£8,500) minus cash adjustment (£500) = £8,000.
If there had been no consideration other than the exchange of assets and the values used were agreed, X’s chargeable gain would be increased by £500 and Y’s chargeable gain reduced by £500. The acquisition cost of X’s new asset, the painting, would be reduced by £500 and Y’s acquisition cost of the piece of jewellery increased by £500.
Land
Land often features in exchange transactions, particularly where shares in properties are exchanged. A common example is where the two joint owners of two properties each give up a half share in one property and assume full ownership of the other. The result is that each person disposes of their half share in one property and acquires the remaining half share in the other. In principle, these exchanges are treated in the same way as other exchanges of assets. However, in certain circumstances a form of roll-over relief may be available under s248A to s248E, see CG73000+.
Where the exchange involves properties which are the only or main residence of the individuals who are exchanging interests, see CG65150+.