Corporation Tax Act 2009 section 166

Sale basis of valuation: sale to connected person

Section 166 establishes the valuation rule that applies when trading stock is sold to a connected person on cessation of a trade, requiring the stock to be valued at an arm's length price rather than at whatever price the connected parties may have agreed between themselves.

• When a trader ceases trading and sells stock to a connected person who will use it in a UK trade and can deduct its cost for tax purposes, special valuation rules apply unless both parties jointly elect otherwise under section 167.
• The stock must be valued at the price that would have been achieved if the sale had taken place between independent persons dealing at arm's length, rather than at the actual price agreed between the connected parties.
• An arm's length price is not necessarily the same as open market value — it reflects what the actual seller, with their own level of knowledge and information, would have negotiated with an independent buyer, rather than assuming perfect information on both sides.
• Because there is a real sale taking place, the rule only adjusts the price to arm's length terms rather than creating a hypothetical transaction, which means the valuation can reflect the particular value the stock holds for a buyer who intends to use it in their trade.