Where shares are sold to a connected person, Section 18(2) TCGA
1992 requires that the statutory open market value of the shares,
if different, be substituted for the consideration received
regardless of whether the sale price was agreed after lengthy
negotiation or whether the parties were separately advised. SAV is,
therefore, asked to negotiate a market value and it is not uncommon
to find that the shares have been sold at over value. Often the
difference arises because of the rules which apply to the valuation
of minority holdings. It may be that SAV needs to take a broader
view of the circumstances as a whole since the parties may have
been very much at arm's length with no intention to confer bounty.
It should always be remembered that, where connected persons are
concerned, one person's disposal is the other's acquisition value.
Insofar as the latter is concerned, the substitution of a lower
value in place of the purchase price could cause difficulties when
the shares are subsequently disposed of.
You should refer any case involving a sale between
connected persons to your teamleader at an early stage.
In any case involving
sales between connected persons your first task is
to consider whether any possible element of bounty is involved. In
doing so you should have regard to the overall circumstances, e.g.
the relationship and the reason for the 'disposal', and form a view
as to whether the parties were, in fact, at arm's length. If they
were you must have a very good reason to interfere: a view that on
a hypothetical statutory market basis the value
might be different is not in itself a good reason
where the parties were clearly at arm's length.
If it is decided that we should accept the actual
consideration as the open market value, the acceptance should be
without prejudice to any other valuation for HMRC purposes, unless
you are fully satisfied with the value offered on normal
hypothetical open market grounds.
Where the transferor and transferee were clearly at arm's
length, therefore, it will usually be possible to accept the actual
consideration as open market value in computing the gain. If the
transferor insists that an open market value lower than the actual
consideration should be negotiated, you should notify the Inspector
who should arrange for the purchaser to be joined in the
negotiations (see Chapter 107 of this manual
SVM107060).
If the consideration given exceeds the open market value of
the shares, you should consider any possible IHT claim i.e.
If it is considered that an IHT claim could arise under either
head a further qualification must be added to the letter to
safeguard the claim. For example, in the case of the vendor, you
should say that acceptance of the sale price 'is not to be taken as
indicating that the requirements of Section 10(2) IHTA 1984 are
considered to be satisfied for IHT purposes.' As regards the
acquirer the matter should be discussed with your Team Leader.
Where the sale of shares is between an individual and a
connected company (i.e. a company controlled by him either alone or
jointly with other persons connected with him) and the individual
receives the greater benefit from the transaction - i.e. as vendor
he receives more than, or as a purchaser pays less than, the market
value of the shares - there may be tax implications for taxes other
than CGT. In particular you should ask the S.94 specialist to
consider whether there is any IHT claim under Sections 94-102 IHTA
1984.
Losses on disposals to a connected person are only available
against gains on disposals to the same connected person. If,
therefore, it appears that a valuation will result in such a loss
and the valuation is proving difficult, you should consult with the
Inspector as to the likelihood of the losses being able to be set
against subsequent gains.
| Additional Guidance: SVM150000 |
