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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.