CG65760 - Transfer of a business to a company: example: consideration partly satisfied by sum credited to director’s 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 £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:

	£		£
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:

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

Gains on transfer of chargeable assets:

	£	£
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

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’s loan account, £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:

£34,000 x	34,000 (B)	= £19,267
	60,000

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

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