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HMRC internal manual

Capital Gains Manual

Partnerships: Partnership mergers: SP D12: Section 10

On the occasion of a merger of the businesses of two or more partnerships to form a single partnership any reallocations of partners’ fractional interests in the assets of the merged entity will be treated as an acquisition or a disposal arising from a change in partnership sharing ratios.

Paragraph 10 of SP D12 explains that the CG treatment will follow the practice for dealing with changes in partnership sharing ratios described in paragraphs 4, 6 and 7 of SP D12, see CG27500.

Roll-over relief

If a gain arises to a partner on a reduction of his fractional interest in an asset of the pre-merger partnership he may be able to claim roll-over relief under TCGA92/S152 against the acquisition of a fractional interest in an asset of the post-merger partnership subject to the relevant conditions for relief being satisfied.

For the purpose of a roll-over relief claim the trade or profession carried on by the pre-merger partnership will be regarded as being the same as that carried on by the post-merger partnership.

Where the consideration for the acquisition of a fractional interest in an asset of the post-merger partnership is less than the disposal consideration for the fractional interest in an asset of the pre-merger partnership, any roll-over relief due will be subject to restriction under TCGA92/S153.

Further guidance on partnerships and roll-over relief is available at CG61150 onwards.

Example

For the purpose of this example it can be accepted that the market value rule in TCGA92/S17/S18 does not apply, see CG27800.

Facts

Partnership X

A and B are equal partners in Partnership X, a firm of solicitors.

Partnership X owns a freehold property which cost £400,000 and goodwill which had no acquisition cost.

The partners’ CG base costs in the freehold property and goodwill are:

  Property X Goodwill X
     
Partner A £400,000 x 50% = £200,000 Nil
Partner B £400,000 x 50% = £200,000 Nil

The property was revalued to £600,000 in the partnership accounts.  The surplus on revaluation, £200,000, was credited to the partners’ capital accounts as to:

Partner A £200,000 x 50% = £100,000
   
Partner B £200,000 x 50% = £100,000

Goodwill is not included in the partnership accounts.

Partnership Z

C and D are equal partners in Partnership Z, a firm of solicitors.

Partnership Z owns a freehold property which cost £800,000 and goodwill which had no acquisition cost.

The partners’ CG base costs in the property and goodwill were:

  Property Z Goodwill Z
     
Partner C £800,000 x 50% = £400,000 Nil
Partner D £900,000 x 50% = £400,000 Nil

The property is included in the partnership accounts at its cost of £800,000.

Goodwill is not included in the partnership accounts.

Disposals

1)  Partners A, B, C and D decide to merge the businesses carried on by Partnerships X and Z and agree to hold equal shares in the assets of the merged entity.

2) Several years later the merged business was sold as a going concern for £3m apportioned as to:

Freehold property X £840,000
   
Freehold property Z £960,000
Goodwill £1,200,000

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

Freehold property X (£840,000 - £600,000) £240,000 x 25% = £60,000 each
   
Freehold property Z (£960,000 - £800,000) £160,000 x 25% = £40,000 each
Goodwill £1,200,000 x 25% = £300,000 each

Analysis

1)  CG consequences of the merger

Partner A’s fractional interests in the property and goodwill of Partnership X have reduced from 50% to 25%.  He has acquired a 25% interest in the property and goodwill owned by Partnership Z.

Partner B’s fractional interests in the property and goodwill of Partnership X have reduced from 50% to 25%.  He has acquired a 25% interest in the property and goodwill owned by Partnership Z.

Partner C’s fractional interests in the property and goodwill of Partnership Z have reduced from 50% to 25%.  He has acquired a 25% interest in the property and goodwill owned by Partnership X.

Partner D’s fractional interests in the property and goodwill of Partnership Z have reduced from 50% to 25%.  He has acquired a 25% interest in the property and goodwill owned by Partnership X.

Section 4 of SP D12 applies, see CG27500.

CG computations

  Partner A   Partner B  
         
  Property X Goodwill X Property X Goodwill X
Disposal consideration        
BSV £600,000 x 25% £150,000   £150,000  
BSV Nil x 25%   Nil   Nil
Less Cost        
£200,000 x 25%/50% £100,000   £100,000  
Nil x 25%/50%   Nil   Nil
  Gain £50,000 NG/NL Gain £50,000 NG/NL

Note that the gains accruing to each of Partners A and B of £50,000 on the disposals of part of their interests in freehold property X are equal to 50% of the surplus on revaluation that was credited to their capital accounts (£100,000 x 25%/50%).

  Partner C   Partner D  
         
  Property Z Goodwill Z Property Z Goodwill Z
Disposal Consideration        
BSV £800,000 x 25% £200,000   £200,000  
BSV Nil x 25%   Nil   Nil
Less Cost        
£400,000 x 25%/50% £200,000   £200,000  
Nil x 25%/50%   Nil   Nil
  NG/NL NG/NL NG/NL NG/NL

CG base costs to carry forward:

Freehold property X

Partner A £200,000 - £100,000 = £100,000
   
Partner B £200,000 - £100,000 = £100,000
Partner C Nil + (£600,000 x 25%) £150,000 = £150,000
Partner D Nil + (£600,000 x 25%) £150,000 = £150,000

Freehold property Z

Partner A Nil + (£800,000 x 25%) £200,000 = £200,000
   
Partner B Nil + (£800,000 x 25%) £200,000 = £200,000
Partner C £400,000 - £200,000 = £200,000
Partner D £400,000 - £200,000 = £200,000

Goodwill X and Z (following the merger the goodwill of X and Z will be treated as a single asset of the merged entity).

Partner A Nil - Nil + (Nil x 25%) Nil = Nil
   
Partner B Nil - Nil + (Nil x 25%) Nil = Nil
Partner C Nil - Nil + (Nil x 25%) Nil = Nil
Partner D Nil - Nil + (Nil x 25%) Nil = Nil

2)  CG consequences of sale of business

Section 2 of SP D12 applies, see CG27350.

Freehold property X

  Partner A Partner B Partner C Partner D
         
Disposal consideration        
£840,000 x 25% £210,000 £210,000 £210,000 £210,000
Less cost £100,000 £100,000 £150,000 £150,000
Gains £110,000 £110,000 £60,000 £60,000

The gains accruing to Partners A and B reflect the balance of the surplus arising on revaluation (£100,000 x 25%/50%), £50,000 plus the surplus on sale of £60,000 = £110,000.

The gains accruing to Partners C and D reflect their shares of the surplus on sale of £60,000.

Freehold property Z

  Partner A Partner B Partner C Partner D
         
Disposal consideration        
£960,000 x 25% £240,000 £240,000 £240,000 £240,000
Less cost £200,000 £200,000 £200,000 £200,000
Gains £40,000 £40,000 £40,000 £40,000

The gains accruing to the partners are equal to their shares of the surplus on sale of £40,000.

Goodwill

  Partner A Partner B Partner C Partner D
         
Disposal consideration        
£1,200,000 x 25% £300,000 £300,000 £300,000 £300,000
Less cost Nil Nil Nil Nil
Gains £300,000 £300,000 £300,000 £300,000

The gains accruing to the partners are equal to their shares of the surplus on sale of £300,000.