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

Rebasing: SP1/89: example 1: pre-FA 2008 rules: change in partnership sharing ratios - no rebasing election made by disposing partner

Facts

A and B formed a partnership on 1 January 1980 sharing assets on a 50%:50% basis.

The partnership acquired an asset for use in its business on 1 March 1980 for £100,000.

The market value of the asset on 31 March 1982 was £120,000.

Throughout the period the asset was included in the partnership balance sheet at its original cost of £100,000.

Partner A did not make a rebasing election in his capacity as a partner.

Partner B has made a rebasing election in his capacity as a partner.

Disposals

1) On 1 January 2000 C was admitted as a partner and the sharing ratios were changed to A 25%:B 50%:C 25%.

No payment was made by Partner C to Partner A in consideration for the transfer of a 25% interest in the partnership asset.

2) The partnership disposed of the asset on 1 March 2004 for £660,000.

Analysis

1) Change in partnership sharing ratios on 1 January 2000.

Partner A has disposed of a 25% interest in the asset to Partner C.

In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as 25% of the current balance sheet value of the asset, £100,000 x 25% = £25,000.

As the disposal would result in neither a gain nor a loss SP1/89 applies to treat the transfer as a statutory no gain/no loss disposal. Therefore, rebasing does not apply in accordance with TCGA92/S35 (3)(d).

The effect of SP1/89 is that the disposal consideration under paragraph 4 SP D12 is adjusted so that after accounting for indexation allowance neither a gain nor a loss accrues.

Partner A’s CG computation for 1999/2000

Disposal consideration 25%
  • IA £30,000 x 1.047 £25,000
£31,410  
   
   
Less cost £100,000 x 25% £56,410
£25,000  
  Unindexed gain
Indexation allowance £31,410
£31,410    
    NG/NL

CG base cost for Partner A

Partner A £100,000 x 50% = £50,000 - £25,000 = £25,000
   

CG base cost for Partner B

The effect of the rebasing election is that Partner B’s CG base cost will be based on the market value of the asset at 31 March 1982.

Partner B £120,000 x 50% = £60,000
   

Partner C’s acquisition cost

Partner C will be treated as having acquired his 25% interest for £56,410 on 1 January 2000, a sum equal to the disposal consideration taken into account for Partner A.

2) Disposal of the asset on 1 March 2004 for £660,000

In accordance with paragraph 2 of SP D12 the disposal consideration will be apportioned by reference to the partners’ sharing ratios:

Partner A £660,000 x 25% = £165,000
   
Partner B £660,000 x 50% = £330,000
Partner C £660,000 x 25% = £165,000

Partner A’s CG computation for 2003/04

Partner A did not make a rebasing election so the kink test will apply.

  Cost mv 31.03.82
     
Disposal consideration    

Less cost

Less mv 31.03.82 £165,000

£25,000

  £165,000

 

£30,000      
  Unindexed gain £140,000 £135,000
  Indexation allowance    
£30,000 x 1.047 £31,410 £31,410  
  Indexed gain £108,590 £103,590

The chargeable gain before taper relief is the lower of the two gains, £103,590.

The chargeable gain after business asset taper relief is £103,590 x 25% = £25,897.

Partners B and C - CG computation for 2003/04

The effect of SP1/89 is that Partner C’s acquisition cost is adjusted under TCGA92/S55(5) and (6) to £25,000 (£56,410 - £31,410) and he is treated as having held his interest in the partnership asset on 31 March 1982.

Partner C makes a rebasing election in his capacity as a partner.

  B C
     
Disposal consideration    
Less mv 31.03.82 £330,000
£60,000 £165,000
£30,000      
  Unindexed gain £270,000 £135,000
  Indexation allowance    
£60,000/£30,000 x 1.047  
£62,820  
£31,410      
  Indexed gain £207,180 £103,590

Partner B’s chargeable gain after business asset taper relief is £207,180 x 25% = £51,795.

Partner C’s chargeable gain after taper relief is £103,590 x 25% = £25,897.