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Capital Gains Manual

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 paragraph 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 

Paragraph 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