SVM107100 - Capital Gains Procedures: Connected persons

Where shares are sold to a connected person, Section 18(2) TCGA 1992 requires that the statutory open market value of the shares, if different, be substituted for the consideration received regardless of whether the sale price was agreed after lengthy negotiation or whether the parties were separately advised. SAV is, therefore, asked to negotiate a market value and it is not uncommon to find that the shares have been sold at over value.

Often the difference in value arises because of the rules which apply to the valuation of minority holdings. Therefore, it may be necessary to consider whether the sale was intended to confer a gratuitous benefit on the parties to the transaction i.e there was an element of bounty. This is a question for the instructing office to address in conjunction with the “subjective intention” test - see CG 14540 to 14545.

If the customer suggests that the transaction was carried out on an arms’ length basis and will not engage with SAV you should refer the matter back to the instructing office to resolve.

If the consideration given exceeds the open market value of the shares, you should consider any possible IHT claim in other words

• on the transferor because, for example, the disposal is out of a control holding and the sale price - although greater than the open market value of the individual holding sold - is not sufficient to satisfy Section 10(2) IHTA 1984 (this is most likely to arise where control itself is lost) or,
• on the acquirer because the sale price is sufficiently excessive as to contain a clear element of bounty by them.

In the case of disposals made on or after 18 March 1986, most such transfers will be potentially exempt transfers (PETs) under Section 3A IHTA 1984, and the 100% Business Relief which applies to most unquoted shares on or after 6 April 1996 means that IHT implications will be rare.

Where the sale of shares is between an individual and a connected company (i.e. a company controlled by them either alone or jointly with other persons connected to them) and the individual receives the greater benefit from the transaction - in other words as vendor they receive more than, or as a purchaser pays less than, the market value of the shares - there may be tax implications for taxes other than CG. In particular you should ask the instructing office to consider whether there is any IHT claim under Sections 94-102 IHTA 1984.

Losses on disposals to a connected person are only available against gains on disposals to the same connected person. If, therefore, it appears that a valuation will result in such a loss and the valuation is proving difficult, you should consult with the instructing office as to the likelihood of the losses being able to be set against subsequent gains.

Additional Guidance: SVM150000