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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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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.