Guidance

HS288 Partnerships and Capital Gains Tax (2023)

Updated 6 April 2024

This helpsheet explains how partners are treated for Capital Gains Tax and will help you fill in the Capital Gains Tax summary pages of your tax return. But it’s only an introduction. If you’re in any doubt about your circumstances you should ask your tax adviser or HMRC. The Capital Gains Tax Manual explains the rules in more detail.

1. How are partnerships treated for Capital Gains Tax

Partnerships (including Limited Partnerships and those carrying on a trade or business with a view to profit as a limited liability partnership (LLP)) are treated as transparent for Capital Gains Tax. Each partner is responsible for returning any capital gains arising on the disposal of their interests in the assets of the partnership.

This applies to Scottish partnerships as well as those in England, Wales and Northern Ireland.

While this also applies to partnerships which include companies as members, the rules for working out gains of companies, which are chargeable to Corporation Tax, are different from those for individuals. The contents of this helpsheet does not therefore apply to companies who are members of partnerships.

Specific rules apply to LLPs which do not carry on a trade or business with a view to profit or when they are being wound up. If this applies you should ask HMRC or your tax adviser.

2. When HMRC should be given details of any capital gains

You should fill in the Capital Gains Tax summary pages if you were a member of a partnership during the year and any of the following happened:

• the partnership disposed of an asset during the year (for example, it sold part of its business premises)
• you left the partnership during the year
• there was a change in the partnership during the year and you now have a reduced interest in the partnership assets (for example, a new partner joined)

There are special rules for:

• non-residents who dispose of UK property or land including partners in a partnership — see Tell HMRC about Capital Gains Tax on UK property or land if you’re non-resident
• investment managers who receive performance-linked rewards often referred to as carried interest — see Investment managers: Capital Gains Tax treatment of carried interest (July 2015)

3. How you know what your interest is in the assets

Partners are treated as owning a fractional interest in each of the assets of the partnership. The amount of your interest will be decided by any written agreement showing how you and your partners will share the assets, or any written agreement showing how you and your partners will share the profits, or the rules such as in the 1890 Partnership Act which treat you all as having equal shares.

3.1 Example 1

Bill and Ted are in partnership and agree to share profits equally. This means that they’re each treated as having a 50% interest in the assets of the partnership.

4. When you dispose of all of your interest

You dispose of all of your interest if a partnership asset is disposed of to someone outside the partnership.

4.1 Example 2

Jack and Jill are equal partners in a farm. They sell part of the farmland to their neighbour. Each has disposed of all of their 50% interest in the land that’s sold.

You also dispose of all your interest if you leave the partnership completely, for example, when you retire.

4.2 Example 3

Jack reaches retiring age and leaves the partnership. He disposes of all of his 50% interest in the partnership assets to Jill.

5. When you dispose of part of your interest

You may dispose of part of your interest in an asset if the original agreement is altered. This most commonly happens when a new partner joins.

5.1 Example 4

Bill and Ted are joined by a new partner, Alice. They now agree to share profits on a 40%:40%:20% basis. This means that Bill and Ted have each disposed of one-fifth of their original interests.

It may also happen when the partners rearrange matters between themselves.

5.2 Example 5

After 6 months, Bill, Ted and Alice become equal partners. Each partner is now entitled to 33.33% of the profits. Bill and Ted have now made a further disposal of 6.67% of their 40% interests.

6. When you acquire your interest

If the asset is acquired from someone outside the partnership, you acquire your original interest in it at that time.

6.1 Example 6

The partnership of Bill, Ted and Alice buys a new piece of machinery. Each now has a 33.33% interest in that asset.

7. When you acquire a further interest

You may acquire an interest or a further interest in the asset if the original agreement is altered. This most commonly happens when a partner leaves.

It may also happen when the partners agree to revise their sharing arrangements.

7.1 Example 7

Bill resigns from the partnership and disposes of his interest in the assets to Ted and Alice. At the same time, they agree to revise their interests to 40%:60%. As a result, Ted acquires a further 6.67% interest from Bill, Alice acquires a further 26.67%.

8. What you need to do if you’ve disposed of part of your interest

If you’ve disposed of any part, or all, of your interest in a partnership asset, you need to work out any chargeable gain and enter it in your Capital Gains Tax summary pages.

8.1 Points to remember

You’re treated as having a fractional interest in the partnership assets.

You can acquire that interest when:

• an asset is acquired from someone outside the partnership
• there’s a reorganisation within the partnership

You can dispose of that interest when:

• an asset is disposed of to someone outside the partnership
• there’s a reorganisation within the partnership

9. How you work out any chargeable gains

Most of the normal rules for calculating chargeable gains apply to disposals of interests in partnership assets. This helpsheet explains these briefly. If you need help, you should ask HMRC or your tax adviser.

The normal rules do not apply if you acquired your interest in the asset from, or disposed of it to, another partner. See the section about the special rules.

10. The normal rules

There are rules which you have to use if you’re calculating a chargeable gain on the disposal of an interest in a partnership asset. These affect the amount you:

• should include as the disposal proceeds of your interest in the asset
• can deduct for the allowable cost of your interest in the asset
• can deduct if you held your interest in the asset on 31 March 1982

10.1 The amount to be included as the proceeds of disposal

In calculating your chargeable gain on the disposal of your interest in the asset to someone outside of the partnership, you normally include your share of the actual disposal proceeds minus any allowable incidental expenses.

10.2 Example 8

When Jack and Jill sold part of the farmland to their neighbour, they received £25,000 for it and incurred legal fees of £5,000. In calculating their chargeable gains, each should include disposal proceeds of £12,500 minus expenses of £2,500, being the incidental costs of disposal.

In certain circumstances, you may have to include your share of the market value of the asset at the date of disposal, rather than the actual disposal proceeds. Find out more information about when it may be appropriate to use the market value. If you think this might apply, you should consult HMRC or your tax adviser.

The normal rules do not apply if you’ve disposed of your interest in the asset to another partner. See the section about the special rules.

11. How much should you deduct for the cost of the asset

11.1 Assets acquired after 31 March 1982

If the asset was acquired from someone outside the partnership after 31 March 1982 and you acquired your interest at that time, you should deduct your share of the original acquisition cost, plus any allowable incidental expenses.

11.2 Example 9

Caleb, Emma and Raj are equal partners entitled to 33.33% of profits. They paid £30,000 for new property with allowable incidental expenses of £750. If they sell it, each will be able to deduct acquisition costs of £10,000 and expenses of £250.

In certain circumstances, you may have to deduct your share of the market value of the asset at the date of acquisition, rather than the actual cost. Find out more information about when it may be appropriate to use the market value. If you think this might apply, you should consult HMRC or your tax adviser.

11.3 Assets acquired on or before 31 March 1982

If the asset was acquired from someone outside the partnership on or before 31 March 1982 and you acquired your interest at that time, you should deduct your share of the market value of the asset at 31 March 1982, rather than the actual cost. This is known as rebasing.

The normal rules do not apply if you acquired your interest in the asset from another partner. See the section about the special rules.

11.4 Points to remember

You should include your share of the disposal proceeds, less any allowable incidental expenses.

If you acquired your interest in the asset:

• after 31 March 1982, you should deduct your share of the original acquisition cost, plus any allowable incidental expenses
• on or before 31 March 1982, you should deduct your share of the market value of the asset at 31 March 1982

12. The special rules

There are special rules that apply if you acquired your interest in the asset from another partner or have disposed of it to another partner. These affect:

• the amount you should include for the disposal proceeds
• the amount you can deduct for the allowable cost
• whether you should use your share of the 31 March 1982 value of the asset

This helpsheet summarises the way the special rules work. If you need more help, ask HMRC or your tax adviser.

12.1 Disposal proceeds

If you dispose of your interest in the asset to another partner, the special rules treat the disposal proceeds as your share of the balance sheet value of the asset.

12.2 Example 10

When Bill resigns from the partnership, the chargeable assets in the balance sheet are:

Asset	Amount
Property	£240,000
Machinery	£180,000
Goodwill	£60,000

Bill had a 33.33% interest in the assets, so his disposal proceeds are:

Asset	Amount
Property	£80,000
Machinery	£60,000
Goodwill	£20,000

This rule does not apply if you’ve received actual consideration from the other partners. In that case, ask HMRC or your tax adviser.

This rule may not apply if you and the other partners are connected persons, for example, father and son. In that case, you should ask HMRC or your tax adviser.

12.3 Acquisition cost

If you acquire your interest in the asset from another partner, the special rules treat the acquisition cost as your share of the balance sheet value of the asset.

12.4 Example 11

When Bill resigned, Ted acquired a further 6.6% interest in the assets. His acquisition cost of that interest will be:

Asset	Amount
Property	£16,000
Machinery	£12,000
Goodwill	£4,000

This rule does not apply if you’ve given actual consideration to the other partners. In that case, ask HMRC or your tax adviser.

This rule may not apply if you and the other partners are connected persons, for example, father and son. In that case, ask HMRC or your tax adviser.

This rule may not apply where the asset was acquired by the partnership on or before 31 March 1982. In that case, ask HMRC or your tax adviser.

12.5 Transfers at balance sheet value

Because the special rules treat acquisitions and disposals as taking place at balance sheet value you may have to use the same figure for both disposal consideration and acquisition cost. This will depend on whether the assets have been revalued since you acquired your interest in them.

12.6 Example 12 — Assets not revalued

Charles became a member of a partnership in 1990. He was entitled to a 25% interest in the assets. In the balance sheet, these were shown as:

Asset	Amount
Property	£400,000
Goodwill	£80,000

Charles made no payment for his interest, so his acquisition costs are:

Asset	Amount
Property	£100,000
Goodwill	£20,000

In June 2012, Andrew joins as a partner and Charles reduces his interest to 20%. The assets are still in the balance sheet at £400,000 and £80,000, so Charles will use 5% of those values as both his acquisition costs and disposal proceeds for the 5% he transfers to Andrew. He therefore makes neither a gain nor a loss.

A situation such as this is referred to as a no gain or loss disposal. If, however, the assets in the balance sheet have been revalued, then gains or losses may arise.

12.7 Example 13 — Assets revalued

In October 2014, Edward joins the partnership and Charles makes a further 5% reduction in his interest. By now the assets have been revalued to:

Asset	Amount
Property	£1,000,000
Goodwill	£10,000

As the assets have been revalued, Charles’ acquisition costs and disposal proceeds are now different:

Property acquisition and disposal costs

		Amount
Acquisition	5% × £400,000	£20,000
Disposal	5% × £1,000,000	£50,000
Gain		£30,000

Goodwill acquisition and disposal costs
		Amount
Acquisition	5% × £80,000	£4,000
Disposal	5% × £10,000	£500
Loss		£3,500

12.8 Point to remember

Transfers of interests between partners take place at balance sheet value unless actual consideration is paid.

13. Contact

Online forms, phone numbers and addresses for advice on Self Assessment.