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HMRC internal manual

# 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.

Paragraph 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

Paragraph 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.