SolvedCG65760 | Reliefs: Incorporation relief: example: consideration partly satisfied by sum credited to director's loan account
From HM Revenue & Customs · Capital Gains Manual
A transfers his business to A Ltd, a company in which he holds 2 shares which he acquired for a cash consideration of £2.
A Ltd issues 98 shares to A in part consideration for the transfer of the business. The rest of the consideration is satisfied by the conversion of A’s capital account balance into a director's loan account.
The balance sheet of the business at the date of transfer of the business is as follows:
This table shows a simple balance sheet. On the left: Capital account, £26,000 plus creditors, £12,000 totalling £38,000.
On the right:
Freehold property, £14,000, plus Goodwill, £2,000, plus Non-chargeable assets including cash, £22,000 also totalling £38,000
| - | £ | - | £ |
|---|---|---|---|
| Capital account | 26,000 | Freehold property | 14,000 |
| Creditors | 12,000 | Goodwill | 2,000 |
| - | - | Non-chargeable assets | - |
| - | - | including cash | 22,000 |
| - | 38,000 | - | 38,000 |
The following values were agreed as representing the current market values of the assets at the time of the transfer so that the total value of the business transferred to A Ltd was £60,000:
This table shows the calculation of net value of business transferred.
Non-chargeable assets, £22,000 plus freehold property, £37,000, plus Goodwill, £13,000 totals £72,000.
Less creditor, £12,000 gives Net value of business transferred, £60,000.
| - | £ |
|---|---|
| Non-chargeable assets | 22,000 |
| Property | 37,000 |
| Goodwill | 13,000 |
| - | 72,000 |
| Less creditors | 12,000 |
| Net values of assets transferred | 60,000 |
1. Gains on transfer of chargeable assets:
This table shows the calculation of Aggregate net gains on the chargeable assets.
Freehold property, £37,000, less Cost, £14,000, gives Gain on freehold property, £23,000.
Goodwill, £13,000, less Cost, £2,000, gives gain in goodwill, £11,000.
Gain on freehold property, £23,000, plus gain on goodwill £11,000, gives Aggregate net gains, £34,000
| - | £ | £ |
|---|---|---|
| Property | 37,000 | - |
| Less Cost | 14,000 | - |
| Gain | - | 23,000 |
| Goodwill | 13,000 | - |
| Less Cost | 2,000 | - |
| Gain | - | 11,000 |
| Aggregate net gains | - | 34,000 |
2: The consideration received by A for the transfer of the business was 98 shares in A Ltd plus the value of sum credited to his DLA, £26,000. The total consideration is equal to the value of the business transferred, £60,000.
The value of the 98 shares in A Ltd is therefore £60,000 - £26,000 = £34,000.
Proportion of aggregate net gains appropriate to consideration in shares is the gain multiplied by the fraction of A divided by B:
£34,000 × (34,000 ÷ 60,000) = £19,267
This amount is to be deducted from the cost of the 98 shares in A Ltd. The revised cost is therefore £34,000 - £19,267 = £14,733.
3: The balance of aggregate net gainsappropriate to the consideration in the form of credit to the DLA, £34,000 - £19,267 = £14,733, is chargeable in the tax year in which the transfer took place.