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HMRC internal 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

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

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

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