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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
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Example 2: transfer of an asset at market value

Facts

A and B carry on a business in partnership.

Partner A transfers an asset which he acquired four years earlier for £450,000 to the partnership at its current market value of £800,000. The consideration of £800,000 is credited to his capital account.

Partner A and Partner B agree that their interests in the asset will be:

Partner A 100%
   
Partner B 0%

The asset is included in the balance sheet at its cost to the partnership of £800,000.

Two years later the partners agree to change their interests in the asset to:

Partner A 50%
   
Partner B 50%

No consideration is paid by B to A for the acquisition of a 50% interest in the asset.

Three years later the partnership disposes of the asset for £1,200,000.

Transfer of asset

In effect, Partner A has realised a profit of £350,000 (£800,000 - £450,000) on the transfer of the asset to the partnership. However, as he has retained a 100% interest in the asset by virtue of the partnership agreement there is no disposal for CG purposes at the time of the transfer.

The CG base costs of the partners are:

Partner A £450,000
   
Partner B Nil

Note that Partner A’s CG base cost is his original cost of acquisition.

Disposal on change of sharing ratios

Partner A has disposed of a 50% interest in the asset.

Paragraph 4 of SP D12 applies to the calculation of the gain arising on the change in sharing ratios, see CG27500.

The CG computation for Partner A’s disposal of a 50% interest in the asset will be:

  Partner A
   
Disposal consideration based on BSV of the asset  
£800,000 x 50%  
£400,000  
  Less

Acquisition cost

£450,000 x 50%  

 

£225,000    
  Gain £175,000

Partner A’s gain is equivalent to 50% of the profit he realised on the transfer of the asset to the partnership, ie £350,000 x 50% = £175,000.

The CG base costs of the partners for future CG purposes are:

Partner A £450,000 - £225,000 = £225,000
   
Partner B £400,000

Partner A’s CG base cost is based on his original cost of acquisition whilst Partner B’s CG base cost is equivalent to the disposal consideration taken into account for Partner A.

Disposal on sale of asset for £1,200,000

Paragraph 2 of SP D12 applies to the calculation of the gains arising on the disposal of the asset, see CG27350.

  Partner A Partner B
     
Disposal consideration    
£1,200,000 x 50%  
£600,000  
£600,000  
  Less
Acquisition cost  
£225,000  
£400,000      
  Gain £375,000 £200,000

Partner A’s gain of £375,000 is equal to the remainder of the profit realised on the transfer of the asset to the partnership plus his share of the surplus on sale. (£350,000 x 50%) £175,000 + (£400,000 x 50%) £200,000 = £375,000.

Partner B’s gain of £200,000 is equal to his share of the surplus on sale, £400,000 x 50% = £200,000.