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HMRC internal manual

Capital Gains Manual

Partnerships: partners joining or leaving a partnership: examples

Example 1: Admission of a new partner

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 is included in the balance sheet at its acquisition cost of £240,000 and self-generated goodwill which is not included in the balance sheet.

The CG base costs for A and B are:

A          Property £240,000 x 1/2 = £120,000          Goodwill Nil x 1/2 = Nil

B          Property £240,000 x 1/2 = £120,000          Goodwill Nil x 1/2 = Nil

On the admission of C to the partnership the sharing ratios are changed to 1/3 each.

On becoming a partner C makes a capital contribution to the partnership of £50,000 which is credited to his capital account.

No consideration passes directly from Partner C to Partners A and B in respect of the acquisition of a 1/3 interest in partnership assets.

Analysis

Partners A and B are treated as having made a part disposal of their interests in partnership assets because each has disposed of a 1/6 (1/2 – 1/3) interest.

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

The CG computations for A and B are:

  Partner A Partner A Partner B Partner B
         
  Property Goodwill Property Goodwill
Disposal consideration based on BSV        
Property £240,000 x 1/6 £40,000   £40,000  
Goodwill nil x 1/6   Nil   Nil
Less acquisition costs        
Property £120,000 x 1/3 £40,000   £40,000  
Goodwill Nil x 1/3   Nil   Nil
  NG/NL NG/NL NG/NL NG/NL

CG base costs to carry forward:

A Property £120,000 - £40,000 = £80,000 Goodwill Nil – Nil = Nil
     
B Property £120,000 - £40,000 = £80,000 Goodwill Nil – Nil = Nil
C Property £ 40,000 + £40,000 = £80,000 Goodwill Nil + Nil = Nil

C is treated as having acquired his 1/3 interest for an amount equal to the disposal consideration taken into account for A and B.

Note that the £50,000 capital introduced to the partnership by C does not feature in the CG computation as it was credited to his capital account.  It was not a payment made directly or indirectly between the partners.

Example 2: Admission of a new partner following a revaluation of a partnership asset

Facts

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

The partnership owns freehold property which cost £240,000 but which, following a revaluation, is included in the balance sheet at its current value of £300,000.

The CG base costs for A and B are:

A Property £240,000 x 1/2 = £120,000
   
B Property £240,000 x 1/2 = £120,000

The surplus on revaluation, (£300,000 - £240,000) £60,000 was credited to A and B’s capital accounts in proportion to their fractional interests:

Partner A £60,000 x ½ = £30,000
   
Partner B £60,000 x ½ = £30,000

Disposals

1)  On the admission of C to the partnership the sharing ratios are changed to 1/3 each.

On becoming a partner C makes a capital contribution to the partnership of £50,000 which is credited to his capital account.

No consideration passes directly from Partner C to Partners A and B in respect of the acquisition of a 1/3 interest in partnership assets.

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

The surplus on disposal of £600,000 - £300,000 = £300,000 is credited to the partners’ capital accounts as to:

Partner A £300,000 x 1/3 = £100,000
   
Partner B £300,000 x 1/3 = £100,000
Partner C £300,000 x 1/3 = £100,000

Analysis

1)  Admission of C

Partners A and B are treated as having made a part disposal of their interests in partnership assets.

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

  Partner A Partner B
     
Disposal consideration BSV    
£300,000 x 1/6 (1/2-1/3) £50,000 £50,000
  Less acquisition costs  
£120,000 x 1/3  
£40,000  
£40,000      
  Gains £10,000 £10,000

CG base costs to carry forward:

A Freehold property £120,000 - £40,000 = £80,000
   
B Freehold property £120,000 - £40,000 = £80,000
C Freehold property £50,000 + £50,000 = £100,000

C is treated as having acquired his fractional interest for an amount equal to the disposal consideration taken into account for A and B.

2)  Sale of the freehold property for £600,000

The partners’ CG computations will be calculated in accordance with section 2 of SP D12, see CG27350, as follows:

  Partner A Partner B Partner C
       
Disposal consideration      
£600,000 x 1/3  
£200,000  
£200,000  
£200,000        
  Less cost £80,000 £80,000 £100,000
  Gains £120,000 £120,000 £100,000

Note that:

Partner A’s gains of (£10,000 + £120,000) £130,000 are equal to:

Surplus on revaluation £60,000 x 1/2 £30,000
   
Surplus on disposal £300,000 x 1/3 £100,000
  £130,000

 

Partner B’s gains of (£10,000 + £120,000) £130,000 are equal to:

Surplus on revaluation £60,000 x 1/2 £30,000
   
Surplus on disposal £300,000 x 1/3 £100,000
  £130,000
Partner C’s gain of £100,000 is equal to:  
Surplus on disposal £300,000 x 1/3 £100,000

The total gains (£10,000 + £10,000 + £120,000 + £120,000 + £100,000) £360,000 are equal to the overall gain on the property (disposal proceeds £600,000 - acquisition cost £240,000) £360,000.

Example 3: Payments between partners on the admission of a new partner

Facts

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

The only chargeable asset of the partnership consists of goodwill which is not included in the balance sheet.  As there were no costs of acquisition for goodwill the partners’ CG base costs are nil.

Disposals

1)  On the admission of C to the partnership the sharing ratios are changed to 1/3 each.

On joining C makes a capital contribution to the partnership of £40,000 which is credited to his capital account.   In addition he makes a direct payment of £25,000 to each of A and B for his acquisition of an interest in goodwill.

2)  Five years later the partners decide to sell their business as a going concern to a third party.  The disposal consideration for goodwill is £270,000.

Analysis

1)  Admission of C

The CG computations for the part-disposals of A and B’s interests in goodwill based on section 4 of SP D12, see CG27500, are:

  Partner A Partner B
     
Disposal consideration based on BSV    

Nil x 1/6 = Nil

Plus consideration from C - £25,000  

 

£25,000  

 

£25,000  
  Less

Acquisition cost

Nil x 1/3  

 

Nil  

 

Nil      
  Gain £25,000 £25,000

CG base costs to carry forward:

A Nil – Nil = Nil
   
B Nil – Nil = Nil
C £25,000 + £25,000 = £50,000

C is treated as having acquired his fractional interest for an amount equal to the disposal consideration taken into account for A and B.

2)  Sale of goodwill for £270,000

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

  Partner A Partner B Partner C
       
Disposal consideration      
£270,000 x 1/3  
£90,000  
£90,000  
£90,000  
  Less
Acquisition cost  
Nil  
Nil  
£50,000        
  Gains £90,000 £90,000 £40,000

Note that:

Partner A’s gains (£25,000 + £90,000) £115,000 are equal to:

Consideration received from Partner C £25,000
   
Surplus on sale £270,000 x 1/3 £90,000
  £115,000

 

Partner B’s gains (£25,000 + £90,000) £115,000 are equal to:

Consideration received from Partner C £25,000
   
Surplus on sale £270,000 x 1/3 £90,000
  £115,000

 

Partner C’s gain of £40,000 is equal to:

Surplus on sale £270,000 x 1/3 £90,000
   
Less consideration paid to A and B £50,000
  £40,000

 

The total gains (£25,000 + £25,000 + £90,000 + £90,000 + £40,000) £270,000 are equal to the overall gain arising on the disposal of goodwill (disposal proceeds £270,000 – acquisition cost nil) £270,000.

Example 4: A partner leaves after assets have been revalued

Facts

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

The partnership’s chargeable assets consist of freehold property which it acquired for £600,000 but which, following a revaluation, is included in the balance sheet at a value of £900,000 and goodwill which it acquired for £300,000 but which has been written down in the balance sheet to £210,000.

The surplus and deficit on the revaluations were credited and debited to each of the partners’ capital accounts as to:

Property £900,000 - £600,000 = £300,000 x 1/3 = £100,000

Goodwill £210,000 - £300,000 = (£90,000) x 1/3 = (£30,000)

The CG base costs of the partners are:

Partner A Property £600,000 x 1/3 = £200,000 Goodwill £300,000 x 1/3 = £100,000
     
Partner B Property £600,000 x 1/3 = £200,000 Goodwill £300,000 x 1/3 = £100,000
Partner C Property £600,000 x 1/3 = £200,000 Goodwill £300,000 x 1/3 = £100,000

Disposals

1)  On B’s retirement from the partnership the sharing ratios are changed to:

Partner A 1/2
   
Partner C 1/2

The balance on B’s capital account was repaid to him but he did not receive any direct consideration from A and C for the disposal of his 1/3 interest in the freehold property and goodwill.

2)  Three years later A and C decide to retire.  They sell the business as a going concern.  The disposal consideration includes:

Freehold property £960,000
   
Goodwill £360,000

The surpluses on disposal were credited to the partners’ capital accounts as to:

Property

Partner A (£960,000 - £900,000) £60,000 x 1/2 = £30,000
   
Partner C (£960,000 - £900,000) £60,000 x 1/2 = £30,000

 

Goodwill

Partner A (£360,000 - £210,000) £150,000 x 1/2 = £75,000
   
Partner C (£360,000 - £210,000) £150,000 x 1/2 = £75,000

Analysis

1)  Retirement of B

The CG computations for the disposal of B’s 1/3 fractional interest based on section 4 of SP D12, see CG27500, will be:

Partner B Property Goodwill
     
Disposal consideration based on BSV    

Property £900,000 x 1/3

Goodwill £210,000 x 1/3  
£300,000  

 

£70,000      
  Less acquisition cost £200,000 £100,000
    Gain £100,000 Loss £30,000

Note that B’s gain and loss are equal to his one-third share of the surplus/deficit on revaluation of the assets:

Property £900,000 - £600,000 = £300,000 x 1/3 = £100,000

Goodwill £210,000 - £300,000 = (£90,000) x 1/3 = (£30,000)

CG base costs to carry forward:

Partner A

Freehold property £200,000 + (£300,000 x ½) £150,000 = £350,000
   
Goodwill £100,000 + (£70,000 x ½) £35,000 = £135,000

 

Partner C

Freehold property £200,000 + (£300,000 x ½) £150,000 = £350,000
   
Goodwill £100,000 + (£70,000 x ½) £35,000 = £135,000

2)  Sale of business

Section 2 of SP D12 applies to the calculation of the gains arising to A and C, see CG27350.

  Partner A   Partner C  
         
  Property Goodwill Property Goodwill
Disposal consideration        

Property £960,000 x 1/2

Goodwill £360,000 x 1/2  
£480,000  

 

£180,000  
£480,000  

 

£180,000          
  Less acquisition cost £350,000 £135,000 £350,000 £135,000
  Gains £130,000 £45,000 £130,000 £45,000

Note that the partners’ gains are equal to:

Property

Share of surpluses on revaluation and sale £100,000 + £30,000 = £130,000.

Goodwill

Share of surplus on sale less deficit on revaluation £75,000 - £30,000 = £45,000.

The overall gains on the property are equal to the profit arising on sale £960,000 – cost £600,000 = £360,000:

Partner A £130,000
   
Partner B £100,000
Partner C £130,000
  £360,000

The overall gains less losses on goodwill are equal to the profit arising on sale 360,000 – cost £300,000 = £60,000:

Partner A Gain £45,000
     
Partner B Loss £30,000
Partner C Gain £45,000
    £60,000