Taxation of Chargeable Gains Act 1992 section 125

Shares in close company transferring assets at an undervalue

Section 125 deals with the capital gains tax consequences for shareholders when a close company transfers an asset at less than its market value, by reducing the allowable cost of their shares.

• When a close company transfers an asset for less than market value, the shortfall (the "undervalue amount") is apportioned across all its issued shares and reduces the allowable acquisition cost of those shares for capital gains purposes.
• If a shareholder is itself a close company, the undervalue amount apportioned to its shares is further apportioned among the issued shares of that company, cascading through any number of close companies in the ownership chain.
• The section does not apply to intra-group transfers under section 171, nor where the undervalue is already taxed as a distribution to a participator (or associate) or as employment income of an employee of the company.
• Where an asset was held on 31 March 1982 and the gain is computed by reference to original cost rather than the 31 March 1982 value, the section catches transfers made after 6 April 1965 rather than only those after 31 March 1982.