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HMRC internal manual

Capital Gains Manual

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Rebasing: example 5: FA 2008 rules: change in partnership sharing ratios before 6 April 2008 followed by disposal of asset on or after 6 April 2008 - TCGA92/S35A

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 did not make 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 2009 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    
     
    £56,410
  Less cost £100,000 x 25% £25,000
  Unindexed gain  
Indexation allowance £31,410
£31,410    
    NG/NL

CG base costs for Partners A and B

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

Partner C’s acquisition cost 

Partner C will be treated as having acquired his 25% interest in the partnership asset for £56,410 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 2009 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 A and B - CG computations for 2008/09 - FA 2008 rebasing rules

  A B
     
Disposal consideration    
Less mv 31.03.82 £165,000
£30,000 £330,000
£60,000      
  Gains £135,000 £270,000

Partner C - CG computation for 2008/09 - TCGA92/S35A 

The effect of SP1/89 was to treat Partner C as having acquired his 25% interest on 1 January 2000 for £56,410, a sum based on 25% of the original cost of the asset adjusted for indexation allowance.

The changes in FA 2008 which apply to disposals on or after 6 April 2008 mean that the previous rules are superseded with the result that TCGA92/S55 (5) and (6) no longer apply to strip out indexation allowance from Partner C’s CG base cost.

Consistently with HMRC’s practice as set out in SP1/89 the disposal by which Partner C acquired his 25% interest in the asset after 31 March 1982 and before 6 April 2008 may be treated as a statutory no gain/no loss disposal for the purposes of TCGA92/S35A (1)(b), see CG28140.

The effect of TCGA92/S35A is to treat Partner C as having acquired his interest for a sum equal to 25% of the market value of the asset on 31 March 1982 plus indexation allowance for the period 31 March 1982 to April 1998 (the month in which indexation allowance was frozen):

£30,000 (£120,000 x 25%) + £31,410 (£30,000 x 1.047) = £61,410

  C
   
Disposal consideration  
Less cost per TCGA92/S35A (2) £165,000
£61,410    
    £103,590