Income Tax (Trading and Other Income) Act 2005 section 178

Sale basis of valuation: election by connected persons

Section 178 allows connected persons who are party to a sale of trading stock on cessation of a trade to elect to use a value other than the arm's length value that would otherwise apply under section 177.

• Where trading stock is sold to a connected person who will use it in a UK trade, profession or vocation and can deduct its cost for tax purposes, the parties may jointly elect to override the normal arm's length valuation rule
• The election is only available where the arm's length value exceeds both the stock's acquisition value (effectively its book value to the seller) and the actual sale price
• If an election is made, the stock is valued at the higher of its acquisition value or the actual sale price — replacing what could be a significantly higher arm's length figure
• Both parties must make the election on or before the first anniversary of the normal self-assessment filing date for the tax year in which the trade ceased