When advising clients on asset transfers, corporate restructuring, or family wealth planning, practitioners must carefully apply the statutory “connected persons” tests. The UK tax code uses these rules to prevent taxpayers from manipulating transaction values to secure artificial tax advantages.
The primary definitions span the three main tax heads:
- Capital Gains Tax (CGT): Section 286 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).
- Income Tax: Section 993 of the Income Tax Act 2007 (ITA 2007).
- Corporation Tax: Section 1122 of the Corporation Tax Act 2010 (CTA 2010).
While the wording differs slightly across these statutes, the core mechanics and targeted relationships remain largely identical.
Identifying The ‘Connected Persons’ Rule
Under section 286(2) of TCGA 1992, an individual is connected with their spouse or civil partner, their relatives, and the spouses or civil partners of those relatives.
Crucially, the legislation defines a “relative” strictly as a brother, sister, ancestor, or lineal descendant. HMRC applies this strictly; extended family members such as uncles, aunts, nephews, nieces, and cousins fall outside the statutory definition of a relative and are therefore not automatically connected.
“In this section “relative” means brother, sister, ancestor or lineal descendant.”
Table: Common Connected Relationships (Individuals)
| Relationship to Taxpayer | Connected? | Statutory Authority (CGT) |
|---|---|---|
| Spouse or Civil Partner | Yes | s 286(2) TCGA 1992 |
| Sibling (Brother/Sister) | Yes | s 286(2) and (8) TCGA 1992 |
| Parent or Grandparent | Yes (Ancestor) | s 286(2) and (8) TCGA 1992 |
| Child or Grandchild | Yes (Lineal Descendant) | s 286(2) and (8) TCGA 1992 |
| Cousin, Uncle, or Aunt | No | s 286(8) TCGA 1992 |
Beyond individuals, the rules capture complex entity structures. A person acting as a trustee of a settlement is connected with any individual who is a settlor of that settlement, and with any body corporate connected with the settlement. For companies, connection exists if the same person has control of both, or if a group of two or more persons has control of each company.
Partners in a partnership are also connected with each other, though section 286(4) TCGA 1992 specifically exempts acquisitions or disposals of partnership assets made pursuant to genuine, bona fide commercial arrangements.
Tax Consequences: Market Value and Clogged Losses
When connected persons transact, section 18 of TCGA 1992 immediately intervenes. The legislation treats any transaction between connected persons as a transaction made “otherwise than by way of a bargain at arm’s length”.
Consequently, the market value rule in section 17 of TCGA 1992 applies. HMRC will substitute the actual consideration paid (even if it is nil) with the objective market value of the asset at the date of disposal, using this substituted figure to calculate the chargeable gain or allowable loss.
Furthermore, section 18(3) imposes a severe restriction on losses, creating what practitioners refer to as “clogged losses”. If a loss accrues to the person making the disposal, they cannot deduct that loss against general chargeable gains. They may only set it off against a chargeable gain arising on some other disposal of an asset to the exact same connected person, at a time when they are still connected.
The ‘Connected Persons’ Rule: A Case Study
To illustrate these mechanics in practice during the 2026/27 tax year, consider the following scenario involving an individual, David, and a limited company he controls, TechHoldings Ltd.
The Scenario:
David bought a commercial property in 2018 for £200,000. In August 2026, the property has a market value of £150,000 due to local market depreciation. Seeking to realise a capital loss to offset against a significant gain he made earlier in the 2026/27 tax year on a separate stock portfolio, David sells the property to TechHoldings Ltd for £150,000.
1. Establishing Connection:
Under section 286(6) of TCGA 1992, a company is connected with another person if that person has control of it. Because David controls TechHoldings Ltd, he and the company are connected persons.
2. The Disposal Date and Market Value:
David and the company execute an unconditional contract for the sale. Following the Court of Appeal’s judgment in Kellogg Brown & Root Holdings (UK) Ltd v HMRC [2010], practitioners must test connection and determine market value at the date of disposal fixed by section 28 of TCGA 1992 (the date of the unconditional contract). The consideration is deemed to be the £150,000 market value under section 17.
3. The Clogged Loss Application of The ‘Connected Persons’ Rule:
David calculates a capital loss of £50,000 (£200,000 base cost less £150,000 deemed proceeds). However, because he sold the asset to a connected person, section 18(3) triggers. David cannot use this £50,000 loss to offset his general stock portfolio gains in 2026/27. Instead, the £50,000 becomes a clogged loss, carried forward indefinitely, but exclusively available to offset against future gains David makes on subsequent disposals specifically to TechHoldings Ltd.
Consider researching the specific interactions between section 18(3) clogged losses and the incorporation relief provisions under section 162 of TCGA 1992 when transferring an entire business to a connected company.
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