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HMRC internal manual

Capital Gains Manual

Indexation allowance: SP1/89: example

Facts

A and B form a partnership on 1 January 1980 and have equal interests in partnership assets.

The partnership acquired an asset for use in its business on 1 January 1980 for £200,000.

The CG base cost for each partner’s 50% interest is £100,000.

The market value of the asset on 31 March 1982 was £260,000.

Throughout the period of ownership the asset was included in the balance sheet of the partnership at its original cost of £200,000.

Neither of the partners made rebasing elections in their capacity as partners.

Disposals

1) On 1 May 1996 the partners agree to change their sharing ratios to:

Partner A 40%
   
Partner B 60%

No payment was made by Partner B to Partner A in consideration for the transfer of a 10% interest in the asset.

2) The partnership disposed of the asset on 1 May 1997 for £480,000.

Analysis

1) Change in partnership sharing ratios 

Partner A disposed of a 10% interest in the asset to Partner B on 1 May 1996.

In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as 10% of the current balance sheet value of the asset, £200,000 x 10% = £20,000.

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, TCGA92/S35(3)(d) prevents rebasing from applying.

The effect of SP1/89 is to adjust the disposal consideration so that, after accounting for indexation allowance, neither a gain nor a loss accrues.

Partner A’s CG computation for 1996/97

£200,000 x 10%

indexation allowance (based on mv at 31.03.82) +

£260,000 x 10% = £26,000

£26,000 x 0.925 £20,000

 

 

£24,050  
   
  Adjusted disposal consideration
Less cost £200,000 x 10% £44,050
£20,000    
  Unindexed gain £24,050
  Indexation allowance £24,050
    NG/NL

Revised CG base costs

Partner A £100,000 - £20,000 = £80,000
   
Partner B £100,000 + £44,050 = £144,050

2) Disposal of the asset on 1 May 1997 for £480,000 

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

Partner A £480,000 x 40% = £192,000
   
Partner B £480,000 x 60% = £288,000

Partner A’s CG computation for 1997/98 

The kink test will apply.

  Cost MV 31.03.82
     
Disposal consideration    

Less cost

Less mv 31.03.82

£260,000 x 40% £192,000

£80,000

 

  £192,000

 

 

£104,000      
  Unindexed gain £112,000 £88,000
  Indexation allowance (based on mv)    
£104,000 x 0.975  
£101,400  
£88,000 (restricted)      
  Indexed gain £10,600 NG/NL

Partner A will be treated as having made neither a gain nor a loss.

Partner B’s CG computation for 1997/98 

The effect of SP1/89 is that Partner B’s acquisition cost of his additional 10% interest in the asset will be adjusted under TCGA92/S55(5) and (6) and he is treated as having held that additional interest on 31 March 1982.

Adjusted CG base cost:

£144,050 - £24,050 = £120,000.

The kink test will apply.

  Cost MV 31.03.82
     
Disposal consideration    

Less cost

Less mv 31.03.82

£260,000 x 60% £288,000

£120,000

 

  £288,000

 

 

£156,000      
  Unindexed gain £168,000 £132,000
  Indexation allowance (based on mv)    
£156,000 x 0.975  
£152,100  
£132,000 (restricted)      
  Indexed gain £15,900 NG/NL

Partner B will be treated as having made neither a gain nor a loss.