If you are a connected person for tax purposes you will be required to substitute the market value of any asset you transfer or acquire when working out the gain or loss on disposal – not the amount you have actually agreed, unless of course this is the same as market value.

The most likely connection is that you are married or in a Civil Partnership. Fortunately if you and your spouse or civil partner are living together at any time in a tax year in which you make the transfer or sale, any gains are deferred until your spouse or civil partner sells the asset.

One consequence of being connected is that any company you control, either on your own or with other connected persons may be treated as associated companies and affect the amount of company profits that qualify for the small company’s rate.

The full list of connected persons for the purposes of transferring assets is set out below:

  1. Your spouse or civil partner.
  2. Your brothers and sisters, and those of your spouse or civil partner.
  3. Your parents, grandparents or other ancestors, and those of your spouse or civil partner.
  4. Your children and other direct descendents, and those of your spouse or civil partner.
  5. The spouses or civil partners of any of the above relatives.
  6. Your business partners and their spouses or civil partners and relatives (except for genuine commercial acquisitions or disposals of partnership assets.)
  7. As mentioned above any company you control, on your own or with any of the people listed above, will be connected for tax purposes.
  8. The trustees of any settlement where you or any person connected with you is a settlor.

The definition for the purposes of determining associated companies is more limited.

Clogged Losses

If for any reason you dispose of an asset to a connected person and make a loss on the transaction, the loss can only be used in the same year or carried forward and used against future gains, to the same connected person.

It will also be necessary to demonstrate that on the second or subsequent disposal you were still connected.

HMRC refers to these as Clogged Losses!