CG65755 | Reliefs: Incorporation relief: example: consideration partly in shares

A transferred his business with all its assets except cash to X Ltd in consideration for an issue of 1,500 shares in X Ltd plus £108,000 in cash. Liabilities in the sum of £32,500 were transferred with the business.

The balance sheet of the business at the date of transfer was:

This table shows a simple balance sheet. On the left: Capital and Reserves, £69,500, plus Creditors, £32,500, totalling £102,000.

On the right: Non-chargeable business assets, £35,200, plus Cash, £12,000, plus Chargeable assets (at cost): made up of Goodwill, £11,200 and Freehold Premises £43,600, altogether also totalling £102,000.

In the course of negotiations before the transfer to the company, the following values were agreed as representing the current market values of the assets:

This table shows the calculation of net value of business transferred.

Non-chargeable assets, £40,000, plus Goodwill, £35,000, plus freehold premises, £75,000 gives total assets transferred of £150,000.

Less creditors £32,500, gives Net values of business transferred (B), £117,500.

1. Computation of chargeable gains on assets:

This table shows the calculation of Aggregate net gains on the chargeable assets.

Goodwill £35,000, less Cost, £11,200 gives gain on goodwill £23,800.

Freehold premises, £75,000, less Cost £43,600 gives gain on freehold premises of £31,400.

Gain on goodwill, £23,800, plus gain on freehold premises £31,400, gives aggregate net gains, £55,200.

2. Having applied ESC D32, the consideration received by the transferor for the transfer of the business was 1,500 shares in X Ltd plus cash of £108,000.

The total value of the consideration was the calculated net value of the business transferred, £117,500.

Therefore, the cost of the 1,500 shares (A) is the net value of business transferred (B) less the consideration other than shares received by the transferor, £117,500- £108,000 =£9,500.The proportion of aggregate net gains appropriate to the consideration in shares is the gain multiplied by the fraction of A divided by B:

£55,200 × (9,500 ÷ 117,500) = £4,463

This amount is to be deducted from the cost of the shares. The cost figure for the shares to be used on the occasion of any future disposal is therefore £9,500 - £4,463 = £5,037.

3. The balance of the aggregate net gains is the proportion appropriate to the consideration in cash, £55,200 - £4,463 = £50,737, it remains chargeable in the tax year in which the transfer took place.