Capital gains for connected persons

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Capital gains for connected persons
  • What is connection?
  • Individuals
  • Trustees
  • Partnerships
  • Companies
  • Market value rule
  • Disposals subject to restrictions
  • Capital losses
  • Linked transactions

Capital gains for connected persons

The capital gains legislation includes specific provisions for persons who are connected with one another. These provisions can be divided into two broad groups:

  1. rules for transactions between connected persons, and

  2. rules that effectively treat a taxpayer and persons connected with the taxpayer as a single economic unit

The provisions that form the first of these categories (rules for transactions between connected persons) include the market value rule, a restriction on the use of capital losses, and rules on linked transactions, all of which are described below.

The purpose of these provisions is to prevent taxpayers from manipulating the capital gains rules, for instance by creating artificial capital losses by transferring an asset for little or no consideration to a family member or to a company under the taxpayer's control.

The second category (rules that treat a taxpayer and connected persons as a single economic unit) appear throughout the capital gains legislation. An example is in the value shifting rules, which apply where a tax-free benefit has been conferred either on a person disposing of an asset, or on someone connected with that person. The effect of the value shifting rules would be undermined if they could be avoided by conferring a benefit not on the taxpayer, but on a person with a close connection with the taxpayer.

This Practice Note looks

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