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

HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
, see all updates

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 

Paragraph 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 paragraph 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.