When a company sells an asset to a director for less than it is worth, the shortfall does not disappear for tax. The company is usually treated as disposing of the asset at market value for capital gains and capital allowances, and the director is taxed on the difference either as employment income or, if they are also a shareholder receiving it in that capacity, as a distribution. Company law can also bite, because an undervalue sale to a shareholder can be an unlawful distribution if there are not enough distributable profits.

Why does selling below value create a tax charge at all?

Tax law looks through the agreed price to the value that actually passed. A director who pays £2,000 for an asset worth £10,000 has received £8,000 of value from the company, and the tax code has several rules designed to catch that value, both in the company and in the director’s hands. HMRC’s Business Income Manual (BIM47110) lists the questions to work through whenever an employer transfers an asset to a director or employee at undervalue: the trading receipt if the asset is stock, the capital gains proceeds, the capital allowances consequences, the employment income position and whether the transfer is a distribution.

The one thing that does not change is the cash. The director’s payment is the only money the company receives, but several computations will use a deemed figure instead.

How is the director taxed on the undervalue?

As employment income

If the asset passes to the director because of their office or employment, the benefits code applies. Under section 206 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), the cost of the benefit on a transfer of a used or depreciated asset is its market value at the time of transfer, less anything the director pays. Where the asset was previously lent to an employee as a benefit, section 206(3) can substitute a higher figure: the market value when the asset was first provided, less the amounts already taxed as a benefit in each year it was used (EIM21650). Cars, certain computer equipment and cycles covered by the old exemptions are excluded from that higher figure, so for them the market value rule applies.

The benefit goes on form P11D, and the company pays Class 1A National Insurance on it. HMRC’s employer guide CWG5 for 2026 to 2027 lists assets transferred to an employee that are not readily convertible assets, such as furniture or property, as liable to Class 1A, at a rate of 15% for the 2026 to 2027 tax year. See benefits in kind and the P11D and Class 1A National Insurance.

As a distribution

If the director is also a shareholder, section 1020 of the Corporation Tax Act 2010 (CTA 2010) treats a transfer of assets by a company to its members as a distribution where the market value of the benefit received exceeds any new consideration given. The distribution equals the excess, measured at market value. HMRC’s guidance (CTM15250) adds that paragraph B of section 1000(1) can apply instead where the transfer is in respect of shares, and since 17 July 2012 the two paragraphs no longer overlap.

For a close company, section 1064 CTA 2010 separately treats the cost of providing benefits or facilities for a participator as a distribution, measured by the benefits code cash equivalent. See close company rules.

Which treatment wins?

HMRC accepts that the answer depends on the capacity in which the asset was received (CTM15290). To be employment income the value must flow from the office or employment; to be a distribution it must be received as a member. HMRC acknowledges there may be little evidence pointing one way or the other. If the employment income basis is agreed, the distribution provisions in section 1000(1) paragraphs B and G do not apply. A transfer made as compensation for loss of office is treated as employment income, not a distribution.

What happens to the company’s corporation tax?

Chargeable gains

Section 17 of the Taxation of Chargeable Gains Act 1992 (TCGA) deems a disposal to be at market value where it is not a bargain at arm’s length, or where it is made in recognition of services in an office or employment. A director who controls the company is also a connected person under section 286(6), and section 18 then treats the transaction as not at arm’s length. The company’s gain is therefore computed on market value, not the price paid. Any loss on a disposal to a connected person can only be set against gains on later disposals to that same person (section 18(3)). See company capital gains.

Capital allowances

For plant and machinery, the disposal value on a sale is normally the net proceeds, but item 2 of the table in section 61 of the Capital Allowances Act 2001 (CAA 2001) substitutes market value where the sale is below market value, there is no charge to tax under ITEPA, and the buyer cannot claim allowances on the purchase. So if the director is taxed on the benefit, the company uses the actual price. If the asset is given outright and the director is chargeable under ITEPA, section 63(1) makes the disposal value nil. HMRC’s manual (CA23250) stresses that the nil value applies only to a genuine gift, and that a company cannot both claim a revenue deduction for the transfer and treat it as a gift. Disposal values are also capped at original cost (section 62). See balancing charges and allowances.

A deduction for the company

BIM47110 explains that where the asset is not transferred to settle a quantified debt for services, the company can generally deduct the market value less the price paid, as though it had sold the asset and paid the cash to the director, unless the transfer was not wholly and exclusively for the trade or was for capital services. Where the value transferred exceeds the commercial value of the director’s services, the excess may be disallowed. A transfer treated as a distribution is not deductible.

What does company law require?

Two rules in the Companies Act 2006 are relevant. First, section 190 requires member approval before a company sells a substantial non cash asset to a director of the company or its holding company, or to a person connected with a director. Under section 191 an asset is substantial if its value exceeds 10% of the company’s net assets and is more than £5,000, or exceeds £100,000. No approval is needed from the members of a wholly owned subsidiary (section 190(4)).

Second, ICAEW’s guidance on distributable profits (TECH 02/17BL, paragraph 2.6A) explains that an undervalue transaction with a shareholder is capable of being a distribution because it contains an element of gift. Section 845 then measures a distribution in kind by reference to book value: if the price is at least the book value, the distribution is nil; if it is less, the distribution is the shortfall, and the company must have profits available for distribution. Without enough profits the transfer can be unlawful, with the consequences described in unlawful dividends and director liability. The tax measure (market value) and the company law measure (book value) are different figures.

What does this look like in practice?

Illustration only. A trading company owned and run by one director bought a painting for its reception for £8,000. It is now worth £20,000. The director buys it for £5,000.

Item Treatment Amount
Company’s disposal proceeds for capital gains Market value under TCGA sections 17 and 18 £20,000
Company’s gain, ignoring indexation for simplicity £20,000 less £8,000 cost £12,000
Value received by the director £20,000 less £5,000 paid £15,000
Company law distribution under section 845 Book value £8,000 less £5,000 paid £3,000

The £15,000 is taxed on the director either as a benefit, with Class 1A for the company, or as a distribution taxed at dividend rates (see dividend tax rates). The company needs at least £3,000 of distributable profits for the transfer to be lawful as a distribution. Because the painting is worth more than £5,000, members must approve the sale under section 190 unless £20,000 is no more than 10% of the company’s net assets.

What mistakes come up most often?

  • Using the price the director paid as the proceeds in the capital gains computation instead of market value.
  • Booking the transfer through the director’s loan account at the agreed price and never reporting the undervalue anywhere.
  • Treating the same undervalue as both a benefit and a distribution, or as neither.
  • Relying on an informal valuation. HMRC can ask the Valuation Office for advice on assets that give rise to a distribution (CTM15250), so keep evidence of how the price was set.
  • Missing the section 190 approval for a larger asset such as a property or a vehicle fleet.

How can the transaction be structured safely?

The simplest route is to sell at an independently supported market value, which removes the benefit, the distribution and the deemed proceeds problem in one step. If a reduced price is intended as reward, decide in advance whether it is remuneration or a return to shareholders, record that decision in board minutes, and report it consistently on the P11D or as a dividend. Check distributable reserves using the relevant accounts before the transfer, and obtain a members’ resolution where section 190 applies.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.