Example 4: Transfer of an asset by a group company to a partnership
A Ltd, B Ltd and C Ltd are members of the same group of companies, ABC Group.
A Ltd and B Ltd form a Limited Liability Partnership (LLP) in which they hold equal interests.
C Ltd sells a freehold property which it acquired several years earlier for £1,500,000 to LLP for an amount equal to its current market value of £2,500,000.
The property is included in the accounts at its cost to LLP of £2,500,000.
Two years later D Ltd, a company which is not a member of ABC Group, is admitted to LLP at which time the members’ interests become:
Three years later LLP sells the property for £3,000,000.
The surplus on sale of (£3,000,000 - £2,500,000) £500,000 is credited to the members’ capital accounts as to:
|A Ltd||£500,000 x 25% = £125,000|
|B Ltd||£500,000 x 25% = £125,000|
|D Ltd||£500,000 x 50% = £250,000|
Disposal on sale of freehold property to the partnership
TCGA92/S171 applies to treat the disposal as having been made for a consideration that would result in neither a gain nor a loss because the members of LLP, A Ltd and B Ltd, are in the same group of companies as C Ltd. In consequence the members of LLP will be treated as having acquired their interests in the property for a total consideration equal to the original cost of the asset to C Ltd of £1,500,000, see CG45300+.
The members’ CG base costs* are:
|* A Ltd||* £1,500,000 x 50% = £750,000|
|* B Ltd||* £1,500,000 x 50% = £750,000|
*Note that indexation allowance has been ignored for the purposes of this example.
Disposal on admission of D Ltd
A Ltd and B Ltd have disposed of part of their interests in the property. Paragraph 4 of SP D12 applies to the calculation of the gains arising on the change in partnership sharing ratios, see CG27500.
|A Ltd||B Ltd|
|Disposal consideration based on BSV|
|Less acquisition cost|
|£750,000 x 25%/50%||£375,000||£375,000|
The total gains are equal to 50% of the profit which accrued to C Ltd on the sale of the property to LLP. (£2,500,000 - £1,500,000) £1,000,000 x 50% = £500,000.
The members’ CG base costs for future CG purposes are:
|A Ltd||£750,000 - £375,000 = £375,000|
|B Ltd||£750,000 - £375,000 = £375,000|
|D Ltd||£625,000 + £625,000 = £1,250,000|
Disposal on sale of property for £3,000,000
Paragraph 2 of SP D12 applies to the calculation of the gains arising on the disposal of the property, see CG27350.
|A Ltd||B Ltd||D Ltd|
|£3,000,000 x 25%||£750,000||£750,000|
|£3,000,000 x 50%||£1,500,000|
|Less acquisition cost||£375,000||£375,000||£1,250,000|
The total gains of (£375,000 x 2) £750,000 accruing to A Ltd and B Ltd are equal to the balance of the profit which accrued to C Ltd on the sale of the property to LLP plus their shares of the surplus on sale:
|£2,500,000 - £1,500,000 = £1,000,000 x 50%||£500,000|
|£125,000 + £125,000||£250,000|
The gain of £250,000 accruing to D Ltd is equal to its share of the surplus on sale.