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HMRC internal manual

Life Assurance Manual

Calculation of ‘I’ Income and chargeable gains: Chargeable gains from venture capital limited partnerships TCGA92/SCH7AD: Deemed disposals: computational rules for part-disposals

Unless the partnership is disposing of the last of its relevant assets, any distributions will give rise to a part-disposal of the single asset. The normal part-disposal rule in TCGA92/S42 will apply. However, as it would be hard to establish the market value (MV) of the property remaining after the disposal TCGA92/SCH7AD/PARA6 sets out how MV is determined.

Where there has been a single distribution in the period:

Cost = Total cost of single asset x Distribution received/(MV)

Where MV = Distribution received + book value of recipient’s share in the relevant assets

If there has been one or more disposals after the part-disposal in question in the same accounting period of the partnership, then the further distributions received are added to the MV in the calculation above.

Deemed disposals:  part-disposal example

In period of account of partnership y/e 31/12/2017, Insurance co X has a 50% interest in a qualifying investment partnership VP LLC for which it contributed capital of £3,000.

VP LLC holds the following assets with book values at 31.12.16:

  • shares in (unquoted) A Ltd: £7,000
  • shares in (unquoted) B Ltd: £2,500
  • shares in (unquoted) C Ltd: £2,500

Total relevant assets = £12,000

  • QCBs issued by D Ltd: £5,000

Therefore total assets = £17,000

Cost of the single asset = £3,000 x ((£17,000 - £5,000)/£17,000) = £2,118

In the period VP LLC disposes of its shares in A Ltd and makes two distributions:

  • First distribution = £300, of which £20 represented income >proceeds = £280
  • Second distribution = £700, of which £40 represented income >proceeds = £660

The undistributed proceeds from the sale of shares in A Ltd are used to purchase further QCBs issued by D Ltd.  However the book value of the shares in B Ltd and C Ltd remains unchanged at 31/12/17, therefore the value of shares and non-QCBs (the ‘relevant assets’) in the books of partnership at 31/12/2017 is £5,000. The value of the part retained ‘B’ at 31/12/17 is £2,500 i.e. the company’s 50% share.

Part disposal 1 calculation (ignoring indexation): There is a further disposal in the same accounting period so paragraph 6(3) applies to add the later distribution to the book value at the end of the period.

Cost = £2,118 x (£280/(£280 + £660 + £2,500)) = £172

Gain = £280 - £172 = £108

Part disposal 2 calculation (ignoring indexation): There is no further disposal in the period so paragraph 6(2) applies and the value of the part retained ‘B’ is simply £2,500.

Cost = (£2,118 – £172) x (£660/(£660 + £2,500)) = £406

Gain = £660 - £406 = £254

Total gain on both part-disposals £108 + £254 = £362.

The remaining base cost (ignoring indexation) is £2,118 less (172+406) = £1,540.