Revenue Note for Guidance
543 Transfers of value derived from assets
Summary
This section provides that in 3 types of transaction in which value or valuable rights pass from one person to another the transfer of value is regarded as a disposal and acquisition for the purposes of capital gains tax. This rule applies even where there is no consideration involved. Where there is no consideration or the consideration is not for full value, the transaction is treated as a disposal at market value.
The first situation dealt with is the exercise of power of control by a person in control of a company so that rights are transferred from shares owned by that person or a person connected with that person into other shares.
The second situation is where the lessee of property, who had previously been the owner of the property, makes an arrangement by which there is an adjustment in the terms of the lease in favour of the lessor. In such a case, the adjustment is treated as a further disposal of the interest in the property by the lessee.
The third situation is where a person entitled to enforce a right over an asset extinguishes or abrogates the right. The extinction or abrogation is treated as a disposal of the right.
Details
Substitution of market value
(1) If in the situations dealt with in subsections (2) to (4) no consideration was obtained or additional consideration could have been obtained, the transaction is treated as not being at arm’s length and market value must be substituted for the actual consideration (if any) passing. The market value is the amount (if any) obtained plus the consideration or additional consideration which could have been obtained if the transaction had been at arm’s length.
Shares or rights in companies
(2) Where a person who has control of a company takes action or fails to take action with the result that value passes from the shares owned or rights exercisable by that person or by persons connected with that person into other shares in or rights over the company, the person is treated as having made a disposal of the shares or rights.
Example
A bought 2,000 €1 shares in K Ltd for €100,000 and the purchase gave him control. A later arranged for the issue of 1,000 new class of €1 shares to his son. Immediately after this the rights attaching to the original ordinary shares were reduced to the status of preference shares carrying only a small fixed dividend and all other rights (in voting, profits and on liquidation) passed to the new class of shares. The value of the original shares are thus reduced and value has passed to the new shares.
If the value of the old shares immediately before the arrangement was €150,000 and immediately after €50,000, the computation of the chargeable gain on A (subject to expenses and disregarding indexation relief under section 556) is —
Value of shares before change |
€150,000 |
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Value of shares after change |
€500,000 |
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Value passing from old shares to new |
€100,000 |
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Part cost allowable — |
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|
€66,666 |
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Chargeable gain |
€33,334 |
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The acquisition price of the shares to the son is |
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€100,000 + €1,000 = |
€101,000 |
Land and other property
(3) A disposal of an interest in property is treated as having been made where the former owner of land or property, having become the lessee, agrees to an adjustment of the rights and liabilities under the lease in a manner generally favourable to the lessor.
Example
M buys freehold property for €200,000. He gives his daughter N the freehold subject to a 99 year lease reserved to himself, the rent payable by M to his daughter being merely a nominal amount. The transaction leaves M with virtually the whole property as N is entitled only to a reversion at the end of 99 years and this has little value.
Subsequently, M agrees to pay N a rent equivalent to the true economic rent for the remainder of the term of the lease. The real value has by this transaction passed out of M’s leasehold interest into the reversion of N and M is treated as making a disposal at market value of the interest passed to N. If that value was €250,000, the gain chargeable on M (subject to expenses and disregarding indexation relief under section 556) is —
Value transferred |
€250,000 |
|
Cost of freehold |
€200,000 |
|
Chargeable gain |
€50,000 |
The acquisition price of N’s interest is €250,000.
Rights over assets
(4) The extinction or abrogation, wholly or partly, of a right over an asset is a disposal by the person entitled to enforce the right.
Example
The owner A of a piece of land (cost €80,000) gives it to a friend B subject to A’s continuing occupation on a tenancy. If the market value of the land subject to that tenancy is €100,000, the gain chargeable on A at the date of the gift will be computed by reference to that value. If A subsequently gives up the tenancy, there is a further disposal by A of her rights in the property. If the value of the right to occupy is €20,000 at the end of the tenancy, the chargeable gains (subject to expenses and disregarding indexation relief under section 556) will be—
On the gift |
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Market value of land subject to tenancy |
€100,000 |
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Part cost allowable — |
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|
€66,667 |
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Chargeable gain = |
€33,333 |
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On A giving up the tenancy |
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Market value of right to occupy = |
€20,000 |
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Balance of cost €80,000 less €66,667 = |
€13,333 |
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Chargeable gain = |
€6,667 |
Relevant Date: Finance Act 2019