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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Example 4: Transfer of an asset by a group company to a partnership

Facts

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:

A Ltd 25%
   
B Ltd 25%
D Ltd 50%

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    
£2,500,000x 25% £625,000 £625,000
Less acquisition cost    
£750,000 x 25%/50% £375,000 £375,000
Gains £250,000 £250,000

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
       
Disposal consideration      
£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
       
Gains £375,000 £375,000 £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
  £750,000

The gain of £250,000 accruing to D Ltd is equal to its share of the surplus on sale.