Revenue Note for Guidance

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Revenue Note for Guidance

547 Disposals and acquisitions treated as made at market value

Summary

For the purposes of capital gains tax, market value is in certain situations substituted for the consideration (if any) given or received on the transfer of an asset. This is because either there is no actual purchase and sale price or the price does not represent the true value of the asset. Market value is so substituted in the case of transfers under bargains not at arm’s length, including gifts, capital distributions from a company to its shareholders, transactions where consideration cannot be valued, and acquisitions in connection with loss of employment or diminution of emoluments or in recognition for past services. Market value does not apply where an asset is acquired by way of Ministerial waiver under section 31 of the State Property Act, 1954.

The rule that market value is substituted for the consideration given on the transfer of an asset does not apply to the acquisition of an asset where there is no corresponding disposal of the asset and either there is no consideration given for the asset or the consideration given is less than the market value of the asset. Special rules also apply to determine the cost for capital gains tax purposes of an asset where a company allots shares to a person connected with the company at a price other than their true value.

Details

Acquisitions deemed to be made at market value

(1) The cost of acquisition of an asset is deemed to be equal to the market value of the asset in the following situations —

  • where the asset is not acquired by way of a bargain at arm’s length, including in particular a gift;
  • where the acquisition of the asset is by way of a distribution from a company to a shareholder;
  • where the acquisition of the asset is wholly or partly for a consideration that cannot be valued (such as an acquisition in consideration of natural love and affection or in consideration of marriage, or on discharge of a personal undertaking or a right to unliquidated damages) or the acquisition is on the occasion of the loss of employment, the reduction of emoluments, or in consideration of past services.

(1A) An exception to this rule is made in circumstances where a person acquires an asset by way of Ministerial waiver under section 31 of the State Property Act, 1954. Provision is made that, for capital gains tax purposes, such an acquisition shall be for the amount which the person pays to the Minister for Finance in respect of the waiver.

Allotment of certain shares

(2) The intention of subsection (1) is to substitute, in the cases mentioned in that subsection, the market value of the asset for the consideration (if any) on the acquisition. In the absence of a preventive measure, this rule could be abused by persons connected with a company, who intend to dispose of their shares at a profit, arranging for the issue to themselves of additional shares in the company at a very low price and then claiming, on a subsequent disposal of all of the shares, that the true market value of the new shares should be deducted in determining the chargeable gain on the disposal. The rule could also be abused through the use of section 584(3), which deals with a reorganisation of a company’s share capital (for example, bonus issues or rights issues) and which excludes the operation of the market value principles. Subsection (2) prevents these abuses.

(2)(a) The term “shares” is defined as including stock, which the term already includes under section 5(1). It also includes debentures and interests in companies which have no share capital which are dealt with in section 587(3). It also covers the granting of options to subscribe for shares in a company. These extensions of the meaning of the term are necessary to prevent avoidance by the use of debentures, options, etc rather than shares or stock. The extension of the meaning of “allotment” covers the giving of an interest or the granting of an option, which might not be covered by the normal meaning of “allotment” or “allots” which are used in subsection (2).

(2)(b) Where shares are issued by a company to a person connected (section 10) with the company otherwise than by means of a bargain at arm’s length (that is, not at their true value), the base cost (the cost of the acquisition) of the shares for the purposes of a future disposal of the shares is the lesser of two values, namely —

  • the actual price paid for the shares, and
  • the additional value of the entire holding of shares (including the new shares) over the value of the previous holding of shares.

Acquisitions where there is no corresponding disposal

(3) The rule (in subsection (1)) that market value is substituted for the consideration given on the acquisition of an asset would, in the absence of a preventive measure, be open to abuse in cases where an asset is acquired for less than market value but the person from whom the asset is acquired is not regarded as having made a disposal of the asset for capital gains tax purposes. In such a case, notwithstanding that there is no corresponding charge to capital gains tax on the donor of the asset, the person would invoke subsection (1) so as to be treated as acquiring the asset at market value in order to eliminate or reduce any charge to tax which arises on a subsequent sale of the asset.

An example of the type of case envisaged is shares acquired under a share option scheme. In such a case a company grants share options to an employee and the price paid for the shares is usually less than the market value of the shares on the day they are acquired. The issue by the company of the shares is not regarded as a disposal for capital gains tax purposes so no charge arises on the company. When the shares are subsequently sold by the employee, he/she invokes subsection (1) to substitute the market value of the shares on the date of acquisition as the cost price of the shares instead of the actual price paid for them. This, of course, would reduce or even eliminate any capital gains tax liability.

To counter such potential abuse, subsection (1) is disapplied, that is, a person is not to be regarded as having acquired an asset at market value where —

  • there is no corresponding disposal of the asset, and
  • there is no consideration paid, in money or money’s worth, for the asset or the value of the consideration is less than the market value of the asset

Disposals deemed to be made at market value

(4)(a) The consideration for the disposal of an asset is deemed to be equal to the market value of the asset in the following circumstances —

  • where the disposal is otherwise than by means of a bargain at arm’s length including in particular a gift, and
  • where the consideration cannot be valued.

(4)(b) The above rule does not apply to a disposal by means of a gift made before 20 December, 1974, which is the date on which the Capital Gains Tax Bill, 1974 was made public, and any loss on such a disposal is not an allowable loss.

Relevant Date: Finance Act 2020