Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
, see all updates

Partnership mergers: SP D12: 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.

Paragraph 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%

BSV Nil x 25%  

£150,000

   

 

Nil  

£150,000

   

 

Nil  
  Less cost

£200,000 x 25%/50%

Nil x 25%/50%  

£100,000

   

 

Nil  

£100,000

   

 

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%

BSV Nil x 25%  

£200,000

   

 

Nil  

£200,000

   

 

Nil  
  Less cost

£400,000 x 25%/50%

Nil x 25%/50%  

£200,000

   

 

Nil  

£200,000

   

 

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 

Paragraph 2 of SP D12 applies, see CG27350.

  1. 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.

  1. 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.

  1. 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.