Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Capital Gains Manual

Partnerships: Changes in fractional interests in partnership assets: examples

Example 1: Change in partners’ fractional sharing ratios

Example 2: Revaluation of an asset followed by a change in fractional sharing ratios

Example 3: Revaluation of an asset followed by a change in fractional sharing ratios for which consideration is given

 

Example 1: Change in partners’ fractional sharing ratios

Facts

A and B carry on a business in partnership and hold equal interests in partnership assets.

The partnership’s assets include a freehold property that is included in the balance sheet at its acquisition cost of £500,000.

The CG base costs for A and B are:

A                 £500,000 x 50% = £250,000

B                 £500,000 x 50% = £250,000

The partners subsequently agree to change their interests in the property to:

A   40% and 

B   60%

No consideration passes from B to A for the acquisition of a further 10% interest in the property.

Analysis

Section 4 of SP D12 applies to the calculation of the gain, see CG27500.

A is treated as having made a part disposal of his interest in the property.

The CG computation for A’s disposal of a 10% interest in the property will be:

  Partner A
   
Disposal consideration based on balance sheet value (BSV)   
£500,000 x 10%  
£50,000  
  Acquisition cost
£250,000 x 10%/50%  
£50,000    
    No gain/no loss

CG base costs to carry forward:

A               £250,000 - £50,000 = £200,000

B              £250,000 + £50,000 = £300,000

Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.

 

Example 2: Revaluation of an asset followed by a change in fractional sharing ratios

Facts

A and B carry on a business in partnership and hold equal interests in partnership assets.

The partnership owns a freehold property that it acquired for £400,000 but which, following a revaluation, is included in the balance sheet at £600,000.

The surplus on revaluation of the property, (£600,000 - £400,000) £200,000, was credited to the partners’ capital accounts:

Partner A            £200,000 x 50% = £100,000

Partner B           £200,000 x 50% = £100,000

The only other partnership asset was goodwill which had no cost of acquisition and was not included in the balance sheet.

The partners’ CG base costs are:

  Freehold property Goodwill
     
Partner A £400,000 x 50% = £200,000 Nil x 50% = Nil
Partner B £400,000 x 50% = £200,000 Nil x 50% = Nil

Disposals

1) The partners change their fractional interests to:

A         40%

B         60%

No consideration passes from B to A for his acquisition of a further 10% interest in the property and goodwill.

2) The partnership subsequently disposes of its business as a going concern for £1.2m. 

    The disposal proceeds are apportioned as to:

Freehold Property £800,000
   
Goodwill £200,000
Fixtures £100,000
Stock £100,000

The surpluses on sale of (£800,000 - £600,000) £200,000 for the freehold property and (£200,000 – nil) £200,000 for goodwill were credited to the partners’ capital accounts as to:

  Freehold property Goodwill
     
Partner A £200,000 x 40% = £80,000 £200,000 x 40% = £80,000
Partner B £200,000 x 60% = £120,000 £200,000 x 60% = £120,000

Analysis

1) Change in sharing ratios

Section 4 of SP D12 applies to the calculation of the gain accruing to A on the disposal of a 10% interest in the asset, see CG27500.  The CG computation for A’s disposal is:

Partner A    
     
  Property Goodwill
Disposal consideration based on BSV    

Property £600,000 x 10%

Goodwill Nil x 10%  
£60,000  

 

Nil  
  Acquisition costs

Property £200,000 x 10%/50%

Goodwill Nil x 10%/50%  
£40,000  

 

Nil      
    Gain £20,000 No gain/no loss

Note that A’s gain on the property is equal to the proportion of his share of the surplus on revaluation that is equivalent to the interest that has been disposed of, that is, £100,000 x 10%/50% = £20,000.  At this point in time there is no disposal in respect of the remainder of his 40% interest which he still owns.

CG base costs to carry forward:

  Property Goodwill
     
Partner A £200,000 - £40,000 = £160,000 Nil - Nil = Nil
Partner B £200,000 + £60,000 = £260,000 Nil + Nil = Nil

Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.

2) Disposal of the business

The CG computations for A and B will be calculated in accordance with section 2 of SP D12, see CG27350, as follows:

    Partner A   Partner B
         
Freehold property        
Disposal consideration £800,000 x 40% £320,000 £800,000 x 60% £480,000
Less acquisition costs   £160,000   £260,000
Gains   £160,000   £220,000

Note that A’s gain is equal to the remainder of his share of the surplus on revaluation of (£100,000 - £20,000) £80,000 plus the surplus on sale of £80,000.  Partner B’s gain is equal to his share of the surplus on revaluation of £100,000 plus the surplus on sale of £120,000.

Goodwill   Partner A   Partner B
         
Disposal consideration £200,000 x 40% £80,000 £200,000 x 60% £120,000
Less acquisition costs   Nil   Nil
Gains   £80,000   £120,000

Note that the gains are equal to the surpluses on sale of goodwill that were credited to the partners’ capital accounts.

 

Example 3: Revaluation of an asset followed by a change in fractional sharing ratios for which consideration is given

Facts

A and B carry on a business in partnership and hold equal interests in partnership assets.

The partnership’s chargeable assets include a freehold property that cost £300,000 but which, following a revaluation, is included in the balance sheet at a value of £500,000.

The surplus on revaluation, (£500,000 - £300,000) £200,000, was credited to a reserve account.

The CG base costs for A and B are:

A             £300,000 x 50% = £150,000

B             £300,000 x 50% = £150,000

Disposals

1)  The partners subsequently agree to change their fractional interests in the property to:

A        40% and

B        60%

Partner B pays the sum of £25,000 to Partner A for the acquisition of a further 10% interest in the property.

2)  Two years later the partnership sells the property for £600,000.

Analysis

1) Change in sharing ratios

A is treated as having made a part disposal of his interest in the property.

Section 4 of SP D12 applies to the calculation of the gain, see CG27500.

The CG computation for A’s disposal of a 10% share in the property will be:

    Partner A
     
Disposal proceeds based on BSV    

£500,000 x 10% = £50,000

+

consideration from B - £25,000    

 

 

£75,000  
  Less acquisition cost
£150,000 x 10%/50%    
£30,000      
  Gain   £45,000

CG base costs to carry forward:

A           £150,000 - £30,000 = £120,000

B           £150,000 + £75,000 = £225,000

B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.

2) Sale of the property

Section 2 of SP D12 applies to the calculation of the gains, see CG27350.

  Partner A Partner B
     
Disposal proceeds    

£600,000 x 40%

£600,000 x 60%  
£240,000  

 

£360,000      
  Less cost £120,000 £225,000
  Gains £120,000 £135,000

Note that Partner A’s total gains of (£45,000 + £120,000) £165,000 are equal to:

Surplus on revaluation £200,000 x 50% £100,000
   
Consideration received from Partner B £25,000
Surplus on sale £100,000 x 40% £40,000
  £165,000

Partner B’s gain of £135,000 is equal to:

Surplus on revaluation £200,000 x 50% £100,000
   
Surplus on sale £100,000 x 60% £60,000
  £160,000
Less consideration paid to Partner A £25,000
  £135,000

The total gains of (£45,000 + £120,000 + £135,000) £300,000 are equal to the overall gain arising on the asset (Sale proceeds £600,000 – acquisition cost £300,000) £300,000.