Income Tax (Trading and Other Income) Act 2005 section 456

Securities issued to connected persons etc. at excessive price: subsequent transfers to connected persons

Section 456 prevents a loss from being recognised for tax purposes when a deeply discounted security, originally acquired at above market value, is transferred to a connected person.

• No allowable loss arises on a transfer of a deeply discounted security to a connected person where the transferor acquired the security on its original issue at a price exceeding its market value at that time.
• The rule applies where the transferor was connected with the issuer at the time of issue, or where the issuer was a close company and the transferor, together with other recipients of similar securities, controlled the company.
• The provision closes a loophole whereby market value rules do not apply on original issue but do apply on subsequent transfers, allowing an artificial loss to be created when the issue price exceeds market value and the security is later transferred at market value to a connected person.
• The definition of "close company" follows Chapter 2 of Part 10 of CTA 2010 but includes non-UK resident companies, and "control" has the meaning given by sections 450 and 451 of CTA 2010.