Glossary · UK
What is Arm's Length Transaction?
A deal between two unconnected parties, each acting independently and in their own interest, agreed on open-market terms -- the opposite of a transaction between connected persons, which HMRC can re-price at market value for tax purposes.
Full Definition
An arm's length transaction is a deal negotiated between two parties who have no family, ownership or other close relationship with each other, and who are each acting independently, in their own self-interest, to get the best terms available -- the everyday example being a house sale or the purchase of a used car between two strangers, where the agreed price is assumed to reflect genuine open-market value because neither side has a reason to favour the other. The concept matters most in UK tax law as a benchmark for what a "normal," market-based price looks like. When a transaction takes place between connected persons -- such as close relatives, or a director and the company they control -- there is an obvious risk that the price agreed does not reflect true market value, but has instead been set artificially high or low to shift value, income or gains between the parties in a tax-efficient way, for example by "selling" an asset to a family member for a nominal sum. HMRC's connected persons rules counter this by treating transactions between connected persons as taking place at market value for Capital Gains Tax and other tax purposes, regardless of the price actually paid, effectively requiring the transaction to be reassessed as though it had happened at arm's length. Directors' transactions with their own company, such as loans recorded through a director's loan account, are also expected to be conducted, or at least benchmarked, on arm's length terms to avoid additional tax charges or benefit-in-kind implications.