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HMRC internal manual

Capital Gains Manual

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Rebasing: SP1/89: example 2: pre-FA 2008 rules: change in partnership sharing ratios - 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.

Partners A and B have made rebasing elections in their capacity as partners.

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.

SP1/89 does not apply because the transfer is not one which results in neither a gain nor a loss.

Partner A’s CG computation for 1999/2000

Disposal consideration 25%

Less mv at 31 March 1982

£120,000 x 25% £25,000

 

£30,000    
     
  Loss £5,000

CG base costs for Partners A and B - rebasing elections apply

Partner A £120,000 x 50% = £60,000 - £30,000 = £30,000
   
Partner B £120,000 x 50% = £60,000

Partner C’s acquisition cost 

Partner C will be treated as having acquired his 25% interest in the partnership asset for £25,000 on 1 January 2000, ie 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

Partners’ CG computations for 2003/04

  A B C
       
Disposal consideration      

Less mv 31.03.82

Less cost 01.01.00 £165,000

£30,000

  £330,000

£60,000

  £165,000

 

£25,000  
  Unindexed gain
Gain £135,000 £270,000  
£140,000  
  Indexation allowance
£30,000/£60,000 x 1.047  
£31,410  
£ 62,820  
         
  Indexed gain £103,590 £207,180  

Partner C is not entitled to indexation allowance as he acquired his interest after 31 March 1998.

Chargeable gains after business asset taper relief:

Partner A £103,590 x 25% = £25,897
   
Partner B £207,180 x 25% = £51,795
Partner C £140,000 x 25% = £35,000