SolvedCG65750 | Reliefs: Incorporation relief: example: consideration wholly in shares
From HM Revenue & Customs · Capital Gains Manual
All statutory references in this page are to the Taxation of Chargeable Gains Act 1992 unless otherwise specified.
The basic mechanics of section 162 incorporation relief in a straightforward case are illustrated in the example below. The example assumes Extra Statutory Concession (ESC) D32 applies.
A transferred his business with all its assets to X Ltd in consideration for an issue of 8,000 shares in X Ltd. Liabilities in the sum of £15,000 were transferred with the business.
The balance sheet of the business at the date of transfer was as follows:
This table shows a simple balance sheet. On the left: Capital and reserves, £70,000 plus Creditors, £15,000, totalling £85,000. On the right, Business assets listed as: Non chargeable, £49,000, plus chargeable (at cost) £23,000, plus cash 13,000, also totalling £85,000.
| - | £ | Business assets: | £ |
|---|---|---|---|
| Capital & Reserves | 70,000 | non-chargeable | 49,000 |
| Creditors | 15,000 | chargeable (at cost) | 23,000 |
| - | - | cash | 13,000 |
| - | 85,000 | - | 85,000 |
It was agreed in the course of the negotiations that the current market values of the assets of the business were:
non-chargeable assets = £55,000
chargeable assets = £50,000
and these values were adopted for the purpose of determining the consideration payable to A.
1. Gains on the transfer of chargeable assets:
This table shows the gain calculation. Market value on transfer, £50,000, less cost, £23,000, gives Aggregate net gains, £27,000.
| - | £ |
|---|---|
| Market value on transfer | 50,000 |
| Less Cost | 23,000 |
| - | 27,000 |
The whole of the consideration received by the transferor in exchange for the business was 8,000 shares in X Ltd.
The value of the shares was £103,000:
This table shows the calculation of net value of business transferred.
Non-chargeable business assets, £55,000, plus Chargeable business assets,£50,000, plus Cash, £13,000 gives Total assets transferred, £118,000.
Total assets transferred £118,000 less creditors, £15,000 gives Net value of business transferred (B), £103,000.
| - | £ |
|---|---|
| Non-chargeable business assets | 55,000 |
| Chargeable business assets | 50,000 |
| Cash | 13,000 |
| - | 118,000 |
| Less creditors | 15,000 |
| Value of consideration | 103,000 |
2. Proportion of aggregate net gains appropriate to the consideration in shares is the gain multiplied by the fraction of A divided by B:
£27,000 × (103,000 ÷ 103,000) = £27,000
This amount is to be deducted from the cost of the shares. The base cost of the shares to be used on the occasion of their disposal is £103,000 - £27,000 = £76,000.
3. The balance of aggregate net gains is nil, the gain is relieved in full.