CG27740 - Partnership mergers: SP D12: example
For the purpose of this example it can be accepted that the market value rule in TCGA92/S17/S18 does not apply, see CG27800+.
Facts
Partnership X
A and B are equal partners in Partnership X, a firm of solicitors.
Partnership X owns a freehold property which cost £400,000 and goodwill which had no acquisition cost.
The partners' CG base costs in the freehold property and goodwill are:
|
|
Property X |
Goodwill X |
|
Partner A |
£400,000 x 50% = £200,000 |
Nil |
|
Partner B |
£400,000 x 50% = £200,000 |
Nil |
The property was revalued to £600,000 in the partnership accounts. The surplus on revaluation, £200,000, was credited to the partners' capital accounts as to:
|
Partner A |
£200,000 x 50% = £100,000 |
|
Partner B |
£200,000 x 50% = £100,000 |
Goodwill is not included in the partnership accounts.
Partnership Z
C and D are equal partners in Partnership Z, a firm of solicitors.
Partnership Z owns a freehold property which cost £800,000 and goodwill which had no acquisition cost.
The partners' CG base costs in the property and goodwill were:
|
|
Property Z |
Goodwill Z |
|
Partner C |
£800,000 x 50% = £400,000 |
Nil |
|
Partner D |
£900,000 x 50% = £400,000 |
Nil |
The property is included in the partnership accounts at its cost of £800,000.
Goodwill is not included in the partnership accounts.
Disposals
1) Partners A, B, C and D decide to merge the businesses carried on by Partnerships X and Z and agree to hold equal shares in the assets of the merged entity.
2) Several years later the merged business was sold as a going concern for £3m apportioned as to:
|
Freehold property X |
£840,000 |
|
Freehold property Z |
£960,000 |
|
Goodwill |
£1,200,000 |
The surpluses on sale were credited to the partners' capital accounts as follows:
|
Freehold property X |
(£840,000 - £600,000) £240,000 x 25% = £60,000 each |
|
Freehold property Z |
(£960,000 - £800,000) £160,000 x 25% = £40,000 each |
|
Goodwill |
£1,200,000 x 25% = £300,000 each |
Analysis
1) CG consequences of the merger
Partner A's fractional interests in the property and goodwill of Partnership X have reduced from 50% to 25%. He has acquired a 25% interest in the property and goodwill owned by Partnership Z.
Partner B's fractional interests in the property and goodwill of Partnership X have reduced from 50% to 25%. He has acquired a 25% interest in the property and goodwill owned by Partnership Z.
Partner C's fractional interests in the property and goodwill of Partnership Z have reduced from 50% to 25%. He has acquired a 25% interest in the property and goodwill owned by Partnership X.
Partner D's fractional interests in the property and goodwill of Partnership Z have reduced from 50% to 25%. He has acquired a 25% interest in the property and goodwill owned by Partnership X.
Paragraph 4 of SP D12 applies, see CG27500.
CG computations
|
|
Partner A |
|
Partner B |
|
|
|
Property X |
Goodwill X |
Property X |
Goodwill X |
|
Disposal consideration |
|
|
|
|
|
BSV £600,000 x 25% |
£150,000 |
|
£150,000 |
|
|
BSV Nil x 25% |
|
Nil |
|
Nil |
|
Less cost |
|
|
|
|
|
£200,000 x 25%/50% |
£100,000 |
|
£100,000 |
|
|
Nil x 25%/50% |
|
Nil |
|
Nil |
|
|
Gain £50,000 |
NG/NL |
Gain £50,000 |
NG/NL |
Note that the gains accruing to each of Partners A and B of £50,000 on the disposals of part of their interests in freehold property X are equal to 50% of the surplus on revaluation that was credited to their capital accounts (£100,000 x 25%/50%).
|
|
Partner C |
|
Partner D |
|
|
|
Property Z |
Goodwill Z |
Property Z |
Goodwill Z |
|
Disposal consideration |
|
|
|
|
|
BSV £800,000 x 25% |
£200,000 |
|
£200,000 |
|
|
BSV Nil x 25% |
|
Nil |
|
Nil |
|
Less cost |
|
|
|
|
|
£400,000 x 25%/50% |
£200,000 |
|
£200,000 |
|
|
Nil x 25%/50% |
|
Nil |
|
Nil |
|
|
NG/NL |
NG/NL |
NG/NL |
NG/NL |
CG base costs to carry forward:
Freehold property X
|
Partner A |
£200,000 - £100,000 = £100,000 |
|
Partner B |
£200,000 - £100,000 = £100,000 |
|
Partner C |
Nil + (£600,000 x 25%) £150,000 = £150,000 |
|
Partner D |
Nil + (£600,000 x 25%) £150,000 = £150,000 |
Freehold property Z
|
Partner A |
Nil + (£800,000 x 25%) £200,000 = £200,000 |
|
Partner B |
Nil + (£800,000 x 25%) £200,000 = £200,000 |
|
Partner C |
£400,000 - £200,000 = £200,000 |
|
Partner D |
£400,000 - £200,000 = £200,000 |
Goodwill X and Z (following the merger the goodwill of X and Z will be treated as a single asset of the merged entity).
|
Partner A |
Nil - Nil + (Nil x 25%) Nil = Nil |
|
Partner B |
Nil - Nil + (Nil x 25%) Nil = Nil |
|
Partner C |
Nil - Nil + (Nil x 25%) Nil = Nil |
|
Partner D |
Nil - Nil + (Nil x 25%) Nil = Nil |
2) CG consequences of sale of business
Paragraph 2 of SP D12 applies, see CG27350.
- Freehold property X
|
|
Partner A |
Partner B |
Partner C |
Partner D |
|
Disposal consideration |
|
|
|
|
|
£840,000 x 25% |
£210,000 |
£210,000 |
£210,000 |
£210,000 |
|
Less cost |
£100,000 |
£100,000 |
£150,000 |
£150,000 |
|
Gains |
£110,000 |
£110,000 |
£60,000 |
£60,000 |
The gains accruing to Partners A and B reflect the balance of the surplus arising on revaluation (£100,000 x 25%/50%), £50,000 plus the surplus on sale of £60,000 = £110,000.
The gains accruing to Partners C and D reflect their shares of the surplus on sale of £60,000.
- Freehold property Z
|
|
Partner A |
Partner B |
Partner C |
Partner D |
|
Disposal consideration |
|
|
|
|
|
£960,000 x 25% |
£240,000 |
£240,000 |
£240,000 |
£240,000 |
|
Less cost |
£200,000 |
£200,000 |
£200,000 |
£200,000 |
|
Gains |
£40,000 |
£40,000 |
£40,000 |
£40,000 |
The gains accruing to the partners are equal to their shares of the surplus on sale of £40,000.
- Goodwill
|
|
Partner A |
Partner B |
Partner C |
Partner D |
|
Disposal consideration |
|
|
|
|
|
£1,200,000 x 25% |
£300,000 |
£300,000 |
£300,000 |
£300,000 |
|
Less cost |
Nil |
Nil |
Nil |
Nil |
|
Gains |
£300,000 |
£300,000 |
£300,000 |
£300,000 |
The gains accruing to the partners are equal to their shares of the surplus on sale of £300,000.
