Revenue Note for Guidance

600 Transfer of business to company

Summary

Where a person (other than a company) transfers a business as a going concern to a company wholly or partly in exchange for shares in the company, relief from capital gains tax is available to the extent that the consideration for the transfer is taken in the form of shares. In effect, the gain on the transfer is apportioned between the consideration received in shares and any cash payment, and the part of the gain apportioned to the shares is deducted from the allowable cost of the shares in computing the gain on a future disposal of the shares. In this way the charge on that part of the gain is deferred until the shares are disposed of, while the part of the gain apportioned to the cash payment is chargeable immediately. The relief does not apply unless the transfer is for bona fide commercial reasons and not as part of a tax avoidance scheme.

Details

Definitions

(1) “net chargeable gains” are chargeable gains less allowable losses.

References to the business, in relation to shares or consideration received in exchange for the business, include the assets of the business.

Application

(2) The section applies where a person (other than a company) transfers a business as a going concern to a company wholly or partly in exchange for shares in the company. The whole of the assets of the business or all of those assets other than cash must be transferred. Any shares received are referred to as “the new assets”.

(6) The section does not apply to a transfer of a business to a company unless the transfer is made for bona fide commercial reasons and does not form part of an arrangement or scheme to avoid tax.

The relief

(3) The amount determined under subsection (5) (the amount of the gain not to be charged) is to be deducted from the aggregate of the net chargeable gains on the assets transferred.

(4) The amount of the gain not to be charged is to be apportioned between the new assets as a whole and any sums allowable as a cost of acquisition of those new assets are to be reduced by the amount so apportioned. Where the shares comprising the new assets are not all of the same class, the apportionment between the shares is to be on the basis of market value at the time they were acquired by the person transferring the business.

(5) The amount of the gain not to be charged is the part of the total net gain on the assets transferred which is attributable proportionately to the shares received in exchange for the business.

Example

A person, X, started in business on 6 April, 1980 having purchased a premises on that day for €20,000. On 1 December, 2002 she transfers the business with all its assets except cash to a company in exchange for 5,000 shares in the company and a cash payment of €50,000. The following were agreed market values on 1 December, 2002 —

Stock in trade		€20,000
Goodwill		€40,000
Premises		€150,000
Debtors		€10,000
Total value of assets		€220,000

The following liabilities of the business are to be paid by the company on behalf of X —

Creditors		€4,000
Tax liability		€6,000
Total		€10,000

The gains on the transfer are as follows —

Stock and debtors not chargeable

Goodwill		€40,000
Premises	€150,000
Less €20,000 × 3.091	€61,820	€88,180
Total gain		€128,180

The non-share consideration received by X for the transfer is —

Cash		€50,000
Liabilities taken over (creditors and taxation)		€10,000
		€60,000

As the total value of the assets transferable is €220,000 the amount of the consideration received by X in shares is €220,000 less €60,000, that is, €160,000.

The total gain on the transfer, €128,180, is apportioned between the amount received in shares and the non-share consideration as follows —

€160,000

×€128,180

€220,000

=

€93,222

€60,000

×€128,180

€220,000

=

€34,958

The gain of €34,958 is taxable in the normal manner. The gain of €93,222 is attributable to the consideration received in shares and is not taxable. Instead, the cost of the shares in calculating any liability on a future disposal of the shares is reduced by the deferred gain —

Value of shares	€160,000
Less deferred sum	€93,222
Base cost	€66,778

Relevant Date: Finance Act 2021