# 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

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.