CG27540 - Partnerships: Changes in fractional interests in partnership assets: examples
Example 1: Change in partners바카라 사이트™ fractional sharing ratios
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
The partnership바카라 사이트™s assets include a freehold property that is included in the balance sheet at its acquisition cost of £500,000.
The CG base costs for A and B are:
- A - £500,000 x 50% = £250,000
- B - £500,000 x 50% = £250,000
The partners subsequently agree to change their interests in the property to:
- A - 40%, and
- B - 60%
No consideration passes from B to A for the acquisition of a further 10% interest in the property.
Analysis
Section 4 of SP D12 applies to the calculation of the gain, see CG27500.
A is treated as having made a part disposal of his interest in the property.
The CG computation for A바카라 사이트™s disposal of a 10% interest in the property will be:
| - | Partner A |
|---|---|
| Disposal consideration based on balance sheet value (BSV) | - |
| £500,000 x 10% | £50,000 |
| Acquisition cost | - |
| £250,000 x 10%/50% | £50,000 |
| - | No gain/no loss |
CG base costs to carry forward:
- A - £250,000 - £50,000 = £200,000
- B - £250,000 + £50,000 = £300,000
Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.
Example 2: Revaluation of an asset followed by a change in fractional sharing ratios
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
The partnership owns a freehold property that it acquired for £400,000 but which, following a revaluation, is included in the balance sheet at £600,000.
The surplus on revaluation of the property, (£600,000 - £400,000) £200,000, was credited to the partners바카라 사이트™ capital accounts:
- Partner A - £200,000 x 50% = £100,000
- Partner B - £200,000 x 50% = £100,000
The only other partnership asset was goodwill which had no cost of acquisition and was not included in the balance sheet.
The partners바카라 사이트™ CG base costs are:
| - | Freehold property | Goodwill |
|---|---|---|
| Partner A | £400,000 x 50% = £200,000 | Nil x 50% = Nil |
| Partner B | £400,000 x 50% = £200,000 | Nil x 50% = Nil |
Disposals
1) The partners change their fractional interests to:
- A - 40%
- B - 60%
No consideration passes from B to A for his acquisition of a further 10% interest in the property and goodwill.
2) The partnership subsequently disposes of its business as a going concern for £1.2m. The disposal proceeds are apportioned as to:
| - | Amount |
|---|---|
| Freehold property | £800,000 |
| Goodwill | £200,000 |
| Fixtures | £100,000 |
| Stock | £100,000 |
The surpluses on sale of (£800,000 - £600,000) £200,000 for the freehold property and (£200,000 바카라 사이트“ nil) £200,000 for goodwill were credited to the partners바카라 사이트™ capital accounts as to:
| - | Freehold property | Goodwill |
|---|---|---|
| Partner A | £200,000 x 40% = £80,000 | £200,000 x 40% = £80,000 |
| Partner B | £200,000 x 60% = £120,000 | £200,000 x 60% = £120,000 |
Analysis
1) Change in sharing ratios
Section 4 of SP D12 applies to the calculation of the gain accruing to A on the disposal of a 10% interest in the asset, see CG27500. The CG computation for A바카라 사이트™s disposal is:
| Partner A | - | - |
|---|---|---|
| - | Property | Goodwill |
| Disposal consideration based on BSV | - | - |
| Property £600,000 x 10% | £60,000 | - |
| Goodwill Nil x 10% | - | Nil |
| Acquisition costs | - | - |
| Property £200,000 x 10%/50% | £40,000 | - |
| Goodwill Nil x 10%/50% | - | Nil |
| - | Gain £20,000 | No gain/no loss |
Note that A바카라 사이트™s gain on the property is equal to the proportion of his share of the surplus on revaluation that is equivalent to the interest that has been disposed of, that is, £100,000 x 10%/50% = £20,000. At this point in time there is no disposal in respect of the remainder of his 40% interest which he still owns.
CG base costs to carry forward:
| - | Property | Goodwill |
|---|---|---|
| Partner A | £200,000 - £40,000 = £160,000 | Nil 바카라 사이트“ Nil = Nil |
| Partner B | £200,000 + £60,000 = £260,000 | Nil + Nil = Nil |
Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.
2) Disposal of the business
The CG computations for A and B will be calculated in accordance with section 2 of SP D12, see CG27350, as follows:
| - | - | Partner A | - | Partner B |
|---|---|---|---|---|
| Freehold property | - | - | - | - |
| Disposal consideration | £800,000 x 40% | £320,000 | £800,000 x 60% | £480,000 |
| Less acquisition costs | - | £160,000 | - | £260,000 |
| Gains | - | £160,000 | - | £220,000 |
Note that A바카라 사이트™s gain is equal to the remainder of his share of the surplus on revaluation of (£100,000 - £20,000) £80,000 plus the surplus on sale of £80,000. Partner B바카라 사이트™s gain is equal to his share of the surplus on revaluation of £100,000 plus the surplus on sale of £120,000.
| Goodwill | - | Partner A | - | Partner B |
|---|---|---|---|---|
| Disposal consideration | £200,000 x 40% | £80,000 | £200,000 x 60% | £120,000 |
| Less acquisition costs | - | Nil | - | Nil |
| Gains | - | £80,000 | - | £120,000 |
Note that the gains are equal to the surpluses on sale of goodwill that were credited to the partners바카라 사이트™ capital accounts.
[DN Jill - as with space between EX 1 and Ex 2 above, this space shouldn바카라 사이트™t be here between Exs 2 and 3. Please delete.]
Example 3: Revaluation of an asset followed by a change in fractional sharing ratios for which consideration is given
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
The partnership바카라 사이트™s chargeable assets include a freehold property that cost £300,000 but which, following a revaluation, is included in the balance sheet at a value of £500,000.
The surplus on revaluation, (£500,000 - £300,000) £200,000, was credited to a reserve account.
The CG base costs for A and B are:
- A - £300,000 x 50% = £150,000
- B - £300,000 x 50% = £150,000
Disposals
1) The partners subsequently agree to change their fractional interests in the property to:
- A - 40%, and
- B - 60%
Partner B pays the sum of £25,000 to Partner A for the acquisition of a further 10% interest in the property.
2) Two years later the partnership sells the property for £600,000.
Analysis
1) Change in sharing ratios
A is treated as having made a part disposal of his interest in the property.
Section 4 of SP D12 applies to the calculation of the gain, see CG27500.
The CG computation for A바카라 사이트™s disposal of a 10% share in the property will be:
| - | - | Partner A |
|---|---|---|
| Disposal proceeds based on BSV | - | - |
| £500,000 x 10% = £50,000 | - | - |
| consideration from B - £25,000 | - | £75,000 |
| Less acquisition cost | - | - |
| £150,000 x 10%/50% | - | £30,000 |
| Gain | - | £45,000 |
CG base costs to carry forward:
- A - £150,000 - £30,000 = £120,000
- B - £150,000 + £75,000 = £225,000
B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.
2) Sale of the property
Section 2 of SP D12 applies to the calculation of the gains, see CG27350.
| - | Partner A | Partner B |
|---|---|---|
| Disposal proceeds | - | - |
| £600,000 x 40% | £240,000 | - |
| £600,000 x 60% | - | £360,000 |
| Less cost | £120,000 | £225,000 |
| Gains | £120,000 | £135,000 |
Note that Partner A바카라 사이트™s total gains of (£45,000 + £120,000) £165,000 are equal to:
| - | Amount |
|---|---|
| Surplus on revaluation £200,000 x 50% | £100,000 |
| Consideration received from Partner B | £25,000 |
| Surplus on sale £100,000 x 40% | £40,000 |
| - | £165,000 |
Partner B바카라 사이트™s gain of £135,000 is equal to:
| - | Amount |
|---|---|
| Surplus on revaluation £200,000 x 50% | £100,000 |
| Surplus on sale £100,000 x 60% | £60,000 |
| - | £160,000 |
| Less consideration paid to Partner A | £25,000 |
| - | £135,000 |
The total gains (£45,000 + £120,000 + £135,000) of £300,000 are equal to the overall gain arising on the asset (sale proceeds £600,000 바카라 사이트“ acquisition cost of £300,000).