CG65760 - Transfer of a business to a company: example: consideration partly satisfied by sum credited to director鈥檚 loan account

A transfers his business to A Ltd, a company in which he holds 2 shares which he acquired for a cash consideration of 拢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鈥檚 capital account balance into a director鈥檚 loan account.

The balance sheet of the business at the date of transfer of the business is as follows:

听 拢 听 拢
Capital account 26,000 Freehold property 14,000
Creditors 12,000 Goodwill 2,000
听 Non-chargeable assets 听 听
听 including cash 22,000 听
听 38,000 听 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 拢60,000:

听 拢
Non-chargeable assets 22,000
Property 37,000
Goodwill 13,000
听 72,000
Less creditors 12,000
Net values of assets transferred 60,000

Gains on transfer of chargeable assets:

听 拢 拢
Property 37,000 听
Less Cost 14,000 听
Gain 23,000 听
听 听 听
Goodwill 13,000 听
Less Cost 2,000 听
Gain 11,000 听
Aggregate net gains 34,000 听

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 director鈥檚 loan account, 拢26,000. The total consideration is equal to the value of the business transferred, 拢60,000.

The value of the 98 shares in A Ltd is therefore (拢60,000 - 拢26,000) 拢34,000.

Proportion of aggregate net gains appropriate to consideration in shares:

拢34,000 x 34,000 (B) = 拢19,267
听 60,000 听

This amount is to be deducted from the cost of the 98 shares in A Ltd. The revised cost is therefore 拢14,733 (拢34,000 - 拢19,267).

The balance of aggregate net gains, (拢34,000 - 拢19,267) 拢14,733 is chargeable in the tax year in which the transfer took place.