CTM15250 - Distributions: general: transfer of assets and liabilities by/to members
ICTA88/S209 (4), (5) & (6)
Where a company transfers an asset to one of its members (or vice versa) the transfer can be within either ICTA88/S209 (2) (b) or (4) gives the amount of the distribution as:
- the market value of the asset or benefit received by the member,
less
- the market value of any new consideration CTM15140 the member has given for the asset or benefit.
Similarly, if a member transfers a liability to the company, the distribution to the member is:
- the amount of the liability transferred to the company,
less
- any new consideration the member has given for the transfer of the liability.
The above rule is modified for:
- transfers of assets between group companies, and
- transfers of assets between resident companies not under common control CTM15300.
You should consider whether ICTA88/S209 (2) (b) or (4) applies whenever a company transfers an asset to a member. You should also consider the employment income position where the member is also an employee or director CTM15290.
The Special Commissioners in the Noved case (SC3081/2005) said:
- the transfer of assets at undervalue is capable of falling within both (2) (b) and (4),
- cash transfers are within both (2) (b) and (4).
They also said that Section 209 (4):
- can apply to unilateral transactions in addition to bilateral transactions,
- is not a sweeping up provision, and does some things not dealt with in (2) (b),
- can include a transfer of cash, whether by the company to its member or by the member to the company,
- can apply when the transfer is only to one member,
- covers transfers by or to a member. A transfer to a past member, or to someone else at a member’s direction, is not covered. It is then necessary to consider (2) (b).
Avoidance issues
ICTA88/S209 (4) is written in terms of a transfer between a company and its members. ICTA88/S209 (2)(b) (see CTM15350) may be appropriate in circumstances where the transfer is between a company and an associate of a member.
The amount or value of the net benefit received by the member will constitute the amount of the distribution within ICTA88/S209 (4).
Consider the case where a company transfers a freehold interest in a property to a member in circumstances where the property is subject to a tenancy held by the member. The market value of the tenancy should be taken into account when valuing the freehold interest. In contrast, however, consider the situation where a company grants a lease on a freehold property to a member at market value and then sells the encumbered freehold interest to the member at market value. As a result of these two transactions the member will hold the unencumbered freehold interest but the value of unencumbered freehold will exceed the sum of the market values of the leasehold interest and the encumbered freehold interest. In those circumstances you should seek liability on a distribution based on the market value of the unencumbered freehold interest.
Another company may grant a member an option to buy an asset, such as a house. The price for the house is set when the company grants the option. When the member exercises the option the price the member pays for the company’s asset may be less than the current open market value. It may be contended that the member has given the value of the option as additional consideration for the asset and that no distribution arises. However, since the member has received value from the company in excess of the new consideration given by him, you should seek to treat the full amount of the benefit received by the member as a distribution by the company.
Assistance of District Valuer Services
You may sometimes need to consult District Valuer Services regarding the valuation of an asset-giving rise to a distribution CTM15330.
