CG27650 - Example 2: admission of a new partner following a revaluation of a partnership asset
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
The partnership owns freehold property which cost £240,000 but which, following a revaluation, is included in the balance sheet at its current value of £300,000.
The CG base costs for A and B are:
A |
Property £240,000 x 1/2 = £120,000 |
B |
Property £240,000 x 1/2 = £120,000 |
The surplus on revaluation, (£300,000 - £240,000) £60,000 was credited to A and B’s capital accounts in proportion to their fractional interests:
Partner A |
£60,000 x ½ = £30,000 |
Partner B |
£60,000 x ½ = £30,000 |
Disposals
1) On the admission of C to the partnership the sharing ratios are changed to 1/3 each.
On becoming a partner C makes a capital contribution to the partnership of £50,000 which is credited to his capital account.
No consideration passes directly from Partner C to Partners A and B in respect of the acquisition of a 1/3 interest in partnership assets.
2) Two years later the partnership sells the freehold property for £600,000.
The surplus on disposal of £600,000 - £300,000 = £300,000 is credited to the partners' capital accounts as to:
Partner A |
£300,000 x 1/3 = £100,000 |
Partner B |
£300,000 x 1/3 = £100,000 |
Partner C |
£300,000 x 1/3 = £100,000 |
Analysis
1) Admission of C
Partners A and B are treated as having made a part disposal of their interests in partnership assets.
Paragraph 4 of SP D12 applies to the calculation of the gain, see CG27500.
|
Partner A |
Partner B |
Disposal consideration BSV |
£50,000 |
£50,000 |
£300,000 x 1/6 (1/2 - 1/3) |
|
|
Less acquisition costs |
|
|
£120,000 x 1/3 |
£40,000 |
£40,000 |
Gains |
£10,000 |
£10,000 |
CG base costs to carry forward:
A |
Freehold property £120,000 - £40,000 = £80,000 |
B |
Freehold property £120,000 - £40,000 = £80,000 |
C |
Freehold property £50,000 + £50,000 = £100,000 |
C is treated as having acquired his fractional interest for an amount equal to the disposal consideration taken into account for A and B.
2) Sale of the freehold property for £600,000
The partners' CG computations will be calculated in accordance with paragraph 2 of SP D12, see CG27350, as follows:
|
Partner A |
Partner B |
Partner C |
Disposal consideration |
|
|
|
£600,000 x 1/3 |
£200,000 |
£200,000 |
£200,000 |
Less cost |
£80,000 |
£80,000 |
£100,000 |
Gains |
£120,000 |
£120,000 |
£100,000 |
Note that:
Partner A’s gains of (£10,000 + £120,000) £130,000 are equal to:
Surplus on revaluation £60,000 x 1/2 |
£30,000 |
Surplus on disposal £300,000 x 1/3 |
£100,000 |
|
£130,000 |
Partner B’s gains of (£10,000 + £120,000) £130,000 are equal to:
Surplus on revaluation £60,000 x 1/2 |
£30,000 |
Surplus on disposal £300,000 x 1/3 |
£100,000 |
|
£130,000 |
Partner C’s gain of £100,000 is equal to: |
|
Surplus on disposal £300,000 x 1/3 |
£100,000 |
The total gains (£10,000 + £10,000 + £120,000 + £120,000 + £100,000) £360,000 are equal to the overall gain on the property (disposal proceeds £600,000 - acquisition cost £240,000) £360,000.
