CG28230 - Rebasing: examples: FA 2008 rules: change in partnership sharing ratios on or after 6 April 2008 - FA 2008 rebasing rules
Example 1
Facts
A and B formed a partnership on 1 January 1980 sharing assets on a 50%:50% basis.
The partnership acquired an asset for use in its business on 1 March 1980 for £100,000.
The market value of the asset on 31 March 1982 was £120,000.
Throughout the period the asset was included in the partnership balance sheet at its original cost of £100,000.
Disposals
1) On 1 June 2008 C was admitted as a partner and the sharing ratios were changed to A 25%:B 50%:C 25%.
No payment was made by Partner C to Partner A in consideration for the transfer of a 25% interest in the partnership asset.
2) The partnership disposed of the asset on 1 September 2009 for £660,000.
Analysis
1) Change in partnership sharing ratios on 1 June 2008
Partner A has disposed of a 25% interest in the asset to Partner C.
In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as 25% of the current balance sheet value of the asset, £100,000 x 25% = £25,000.
SP1/89 and the practice outlined in CG28140 in relation to disposal on or after 6 April 2008 do not apply because the transfer is not one which results in neither a gain nor a loss.
Partner A’s CG computation for 2008/09 - FA 2008 rebasing rules
| - | Amount |
|---|---|
| Disposal consideration | £25,000 |
| Less mv 31.03.82 (£120,000 x 25%) | £30,000 |
| Loss | £5,000 |
CG base costs for Partners A and B - FA 2008 rebasing rules
| - | Amount |
|---|---|
| Partner A | £120,000 x 50% = £60,000 - £30,000 = £30,000 |
| Partner B | £120,000 x 50% = £60,000 |
Partner C’s acquisition cost
Partner C will be treated as having acquired his 25% interest in the partnership asset for £25,000 on 1 June 2008, ie a sum equal to the disposal consideration taken into account for Partner A.
2) Disposal of the asset on 1 September 2009 for £660,000
In accordance with paragraph 2 of SP D12 the disposal consideration will be apportioned by reference to the partners’ sharing ratios.
| - | Amount |
|---|---|
| Partner A | £660,000 x 25% = £165,000 |
| Partner B | £660,000 x 50% = £330,000 |
| Partner C | £660,000 x 25% = £165,000 |
CG computations for 2009/10
| - | A | B | C |
|---|---|---|---|
| Disposal consideration | £165,000 | £330,000 | £165,000 |
| Less mv 31.03.82 | £30,000 | £60,000 | - |
| Less cost | - | - | £25,000 |
| Gains | £135,000 | £270,000 | £140,000 |
Example 2
Facts
A and B formed a partnership on 1 January 1980 sharing assets on a 50%:50% basis.
The partnership acquired an asset for use in its business on 1 March 1980 for £100,000.
The market value of the asset on 31 March 1982 was £120,000.
Throughout the period the asset was included in the partnership balance sheet at its original cost of £100,000.
Partners A and B did not make rebasing elections in their capacity as partners.
Disposals
1) On 1 January 2000 C was admitted as a partner and the sharing ratios were changed to A 25%:B 50%:C 25%.
No payment was made by Partner C to Partner A in consideration for the transfer of a 25% interest in the partnership asset.
2) The partnership disposed of the asset on 1 March 2009 for £660,000.
Analysis
1) Change in partnership sharing ratios on 1 January 2000
Partner A has disposed of a 25% interest in the asset to Partner C.
In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as 25% of the current balance sheet value of the asset, £100,000 x 25% = £25,000.
As the disposal would result in neither a gain nor a loss SP1/89 applies to treat the transfer as a statutory no gain/no loss disposal. Therefore, rebasing does not apply in accordance with TCGA92/S35 (3)(d).
The effect of SP1/89 is that the disposal consideration under paragraph 4 SP D12 is adjusted so that after accounting for indexation allowance neither a gain nor a loss accrues.
Partner A’s CG computation for 1999/2000
| - | Amount |
|---|---|
| Disposal consideration 25% | £25,000 |
| + IA £30,000 x 1.047 | £31,410 |
| - | £56,410 |
| Less cost £100,000 x 25% | £25,000 |
| Unindexed gain | £31,410 |
| Indexation allowance | £31,410 |
| - | NG/NL |
CG base costs for Partners A and B
| - | Amount |
|---|---|
| Partner A | £100,000 x 50% = £50,000 - £25,000 = £25,000 |
| Partner B | £100,000 x 50% = £50,000 |
Partner C’s acquisition cost
Partner C will be treated as having acquired his 25% interest in the partnership asset for £56,410 on 1 January 2000, ie a sum equal to the disposal consideration taken into account for Partner A.
2) Disposal of the asset on 1 March 2009 for £660,000
In accordance with paragraph 2 of SP D12 the disposal consideration will be apportioned by reference to the partners’ sharing ratios:
| - | Amount |
|---|---|
| Partner A | £660,000 x 25% = £165,000 |
| Partner B | £660,000 x 50% = £330,000 |
| Partner C | £660,000 x 25% = £165,000 |
Partners A and B - CG computations for 2008/09 - FA 2008 rebasing rules
| - | A | B |
|---|---|---|
| Disposal consideration | £165,000 | £330,000 |
| Less mv 31.03.82 | £30,000 | £60,000 |
| Gains | £135,000 | £270,000 |
Partner C - CG computation for 2008/09 - TCGA92/S35A
The effect of SP1/89 was to treat Partner C as having acquired his 25% interest on 1 January 2000 for £56,410, a sum based on 25% of the original cost of the asset adjusted for indexation allowance.
The changes in FA 2008 which apply to disposals on or after 6 April 2008 mean that the previous rules are superseded with the result that TCGA92/S55 (5) and (6) no longer apply to strip out indexation allowance from Partner C’s CG base cost.
Consistently with HMRC’s practice as set out in SP1/89 the disposal by which Partner C acquired his 25% interest in the asset after 31 March 1982 and before 6 April 2008 may be treated as a statutory no gain/no loss disposal for the purposes of TCGA92/S35A (1)(b), see CG28140.
The effect of TCGA92/S35A is to treat Partner C as having acquired his interest for a sum equal to 25% of the market value of the asset on 31 March 1982 plus indexation allowance for the period 31 March 1982 to April 1998 (the month in which indexation allowance was frozen):
£30,000 (£120,000 x 25%) + £31,410 (£30,000 x 1.047) = £61,410
| - | C |
|---|---|
| Disposal consideration | £165,000 |
| Less cost per TCGA92/S35A (2) | £61,410 |
| - | £103,590 |
Example 3
Facts
A and B formed a partnership on 1 January 1980 sharing assets on a 50%:50% basis.
The partnership acquired an asset for use in its business on 1 March 1980 for £100,000.
The market value of the asset on 31 March 1982 was £120,000.
Throughout the period the asset was included in the partnership balance sheet at its original cost of £100,000.
Partners A and B did not make rebasing elections in their capacity as partners.
Disposals
1) On 1 January 2000 C was admitted as a partner and the sharing ratios were changed to A 25%:B 50%:C 25%.
No payment was made by Partner C to Partner A in consideration for the transfer of a 25% interest in the partnership asset.
2) On 1 June 2008 D is admitted to the partnership and the sharing ratios become A 20%: B 40%: C 20%: D 20%.
No payment was made by Partner D to Partners A, B and C in consideration for the transfer of a 20% interest in the partnership asset.
3) The partnership disposed of the asset on 1 May 2009 for £660,000.
Analysis
1) Change in partnership sharing ratios on 1 January 2000
Partner A has disposed of a 25% interest in the asset to Partner C.
In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as 25% of the current balance sheet value of the asset, £100,000 x 25% = £25,000.
As the disposal would result in neither a gain nor a loss SP1/89 applies to treat the transfer as a statutory no gain/no loss disposal. Therefore, rebasing does not apply in accordance with TCGA92/S35 (3)(d).
The effect of SP1/89 is that the disposal consideration under paragraph 4 SP D12 is adjusted so that after accounting for indexation allowance neither a gain nor a loss accrues.
Partner A’s CG computation for 1999/2000
| - | Amount |
|---|---|
| Disposal consideration 25% | £25,000 |
| + IA £30,000 x 1.047 £25,000 | £31,410 |
| - | £56,410 |
| Less cost £100,000 x 25% | £25,000 |
| Unindexed gain | £31,410 |
| Indexation allowance | £31,410 |
| - | NG/NL |
CG base costs for Partners A and B
| - | Amount |
|---|---|
| Partner A | £100,000 x 50% = £50,000 - £25,000 = £25,000 |
| Partner B | £100,000 x 50% = £50,000 |
Partner C’s acquisition cost
Partner C will be treated as having acquired his 25% interest in the partnership asset for £56,410 on 1 January 2000, a sum equal to the disposal consideration taken into account for Partner A.
2) Change in partnership sharing ratios on 1 June 2008
Partners A, B and C have each disposed of part of their interests in the asset.
In accordance with paragraph 4 of SP D12 the disposal consideration will be treated as a proportion of the current balance sheet value of the asset.
| - | Amount |
|---|---|
| Partner A | £100,000 x 5% = £ 5,000 |
| Partner B | £100,000 x 10% = £10,000 |
| Partner C | £100,000 x 5% = £ 5,000 |
Partners A and B - CG computations for 2008/09 - FA 2008 rebasing rules
| - | A | B |
|---|---|---|
| Disposal consideration | £5,000 | £10,000 |
| Less mv 31.03.82 (£120,000 x 5%/10%) | £6,000 | £12,000 |
| Losses | £1,000 | £2,000 |
Partner C - CG computation for 2008/09 - TCGA92/S35A
The effect of SP1/89 was to treat Partner C as having acquired his 25% interest on 1 January 2000 for £56,410, a sum based on 25% of the original cost of the asset adjusted for indexation allowance.
The changes in FA 2008 which apply to disposals on or after 6 April 2008 mean that the previous rules are superseded with the result that TCGA92/S55 (5) and (6) no longer apply to strip out indexation allowance from Partner C’s CG base cost.
Consistently with HMRC’s practice as set out in SP1/89 the disposal by which Partner C acquired his 25% interest in the asset after 31 March 1982 and before 6 April 2008 may be treated as a statutory no gain/no loss disposal for the purposes of TCGA92/S35A (1)(b), see CG28140.
The effect of TCGA92/S35A is to treat Partner C as having acquired his interest for a sum equal to 25% of the market value of the asset on 31 March 1982 plus indexation allowance for the period 31 March 1982 to April 1998 (the month in which indexation allowance was frozen):
£30,000 (£120,000 x 25%) + £31,410 (£30,000 x 1.047) = £61,410
| - | C |
|---|---|
| Disposal consideration | £5,000 |
| Less cost per TCGA92/S35A (2) (£61,410 x 5%/25%) | £12,282 |
| Loss | £7,282 |
CG base costs for Partners A, B and C
| - | Amount |
|---|---|
| Partner A | £120,000 x 20% = £24,000 |
| Partner B | £120,000 x 40% = £48,000 |
| Partner C | £61,410 - £12,282 = £49,128 |
Partner D’s CG base cost
Partner D will be treated as having acquired his 20% interest in the asset for £20,000, ie for a sum equal to the disposal consideration taken into account for Partners A, B and C (£5,000 + £10,000 + £5,000).
3) Disposal of the asset on 1 May 2009 for £660,000
In accordance with paragraph 2 of SP D12 the disposal consideration will be apportioned by reference to the partners’ sharing ratios:
| - | Amount |
|---|---|
| Partner A | £660,000 x 20% = £132,000 |
| Partner B | £660,000 x 40% = £264,000 |
| Partner C | £660,000 x 20% = £132,000 |
| Partner D | £660,000 x 20% = £132,000 |
Partners’ CG computations for 2009/10
| - | A | B | C | D |
|---|---|---|---|---|
| Disposal consideration | £132,000 | £264,000 | £132,000 | £132,000 |
| Less mv 31.03.82 | £24,000 | £48,000 | - | - |
| Less cost (per TCGA92/S35A) | - | - | £49,128 | - |
| Less cost | - | - | - | £ 20,000 |
| Gains | £108,000 | £216,000 | £82,872 | £112,000 |