CG27640 - 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:
| - | Property | Goodwill |
|---|---|---|
| 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:
| - | Property | Goodwill |
|---|---|---|
| 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:
| - | Property |
|---|---|
| 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:
| - | Calculation |
|---|---|
| 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:
| - | Calculation |
|---|---|
| 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 | £50,000 | £50,000 |
| £300,000 x 1/6 (1/2 – 1/3) | - | - |
| Less acquisition costs | - | - |
| £120,000 x 1/3 | £40,000 | £40,000 |
| Gains | £10,000 | £10,000 |
CG base costs to carry forward:
| - | Freehold property |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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:
| - | Calculation |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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:
| - | Property | Goodwill |
|---|---|---|
| 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:
| - | Amount |
|---|---|
| Freehold property | £960,000 |
| Goodwill | £360,000 |
The surpluses on disposal were credited to the partners’ capital accounts as to:
Property
| - | Calculation |
|---|---|
| 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
| - | Calculation |
|---|---|
| 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 | £300,000 | - |
| Goodwill £210,000 x 1/3 | - | £ 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
| - | Calculation |
|---|---|
| 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
| - | Calculation |
|---|---|
| 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 | £480,000 | - | £480,000 | - |
| Goodwill £360,000 x 1/2 | - | £180,000 | - | £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:
| - | Amount |
|---|---|
| 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:
| - | - | Amount |
|---|---|---|
| Partner A | Gain | £45,000 |
| Partner B | Loss | £30,000 |
| Partner C | Gain | £45,000 |
| - | - | £60,000 |