If a company which is a close company transfers, or has after 31st March 1982 transferred, an asset to any person otherwise than by way of a bargain made at arm’s length and for a consideration of an amount or value less than the market value of the asset, an amount equal to the difference shall be apportioned among the issued shares of the company, and the holders of those shares shall be treated in accordance with the following provisions of this section.

For the purposes of the computation of the gain accruing on the disposal of any of those shares by the person owning them on the date of transfer, an amount equal to the amount so apportioned to that share shall be excluded from the expenditure allowable as a deduction under section 38(1)(a) from the consideration for the disposal.

If the person owning any of the shares at the date of transfer is itself a close company an amount equal to the amount apportioned to the shares so owned under subsection (1) above to that close company shall be apportioned among the issued shares of that close company, and the holders of those shares shall be treated in accordance with subsection (2) above, and so on through any number of close companies.

This section does not apply in the following cases.

• Case 1

  Case 1 is where the transfer of the asset is a disposal to which section 171(1) applies (transfers within a group: general provisions).

• Case 2

  Case 2 is where the transferee is a participator, or an associate of a participator, in the company and an amount equal to the undervalue amount is treated as—

  1. a

     a distribution within section 209(2)(b) or (4) of the Taxes Act (meaning of “distribution”), or

  2. b

     a capital distribution within section 122 of this Act (distribution which is not a new holding within Chapter 2).

• Case 3

  Case 3 is where the transferee is an employee of the company and—

  1. a

     an amount equal to the undervalue amount is treated as the employee’s employment income, and

  2. b

     no part of that amount is treated as exempt income.

In relation to a disposal to which section 35(2) does not apply, subsection (1) above shall have effect with the substitution of “ 6th April 1965 ” for “31st March 1982".

In this section—

• “associate” has the meaning given by F2section 448 of CTA 2010;

• “employee” has the meaning given by section 4 of ITEPA 2003 (as read with section 5(2) of that Act);

• “employment income” has the meaning given by section 7(2) of ITEPA 2003;

• “exempt income” has the meaning given by section 8 of ITEPA 2003;

• “participator” has the meaning given by F4section 454 of CTA 2010;

• “undervalue amount” means the amount by which the amount or value of the consideration for the transfer is less than the market value of the asset transferred.