CG27640 - Partnerships: partners joining or leaving a partnership: examples
Example 1: Admission of a new partner
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
»Ê¹ÚÌåÓýapp partnership’s chargeable assets include a freehold property that is included in the balance sheet at its acquisition cost of £240,000 and self-generated goodwill which is not included in the balance sheet.
»Ê¹ÚÌåÓýapp CG base costs for A and B are:
| - | Property | Goodwill |
|---|---|---|
| A | Property £240,000 x 1/2 = £120,000 | Goodwill Nil x 1/2 = Nil |
| B | Property £240,000 x 1/2 = £120,000 | Goodwill Nil x 1/2 = Nil |
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.
Analysis
Partners A and B are treated as having made a part disposal of their interests in partnership assets because each has disposed of a 1/6 (1/2 � 1/3) interest.
Section 4 of SP D12 applies to the calculation of the gain, see CG27500.
»Ê¹ÚÌåÓýapp CG computations for A and B are:
| - | Partner A | Partner A | Partner B | Partner B |
|---|---|---|---|---|
| - | Property | Goodwill | Property | Goodwill |
| Disposal consideration | - | - | - | - |
| based on BSV | - | - | - | - |
| Property £240,000 x 1/6 | £40,000 | - | £40,000 | - |
| Goodwill nil x 1/6 | - | Nil | - | Nil |
| Less acquisition costs | - | - | - | - |
| Property £120,000 x 1/3 | £40,000 | - | £40,000 | - |
| Goodwill Nil x 1/3 | - | Nil | - | Nil |
| - | NG/NL | NG/NL | NG/NL | NG/NL |
CG base costs to carry forward:
| - | Property | Goodwill |
|---|---|---|
| A | Property £120,000 - £40,000 = £80,000 | Goodwill Nil � Nil = Nil |
| B | Property £120,000 - £40,000 = £80,000 | Goodwill Nil � Nil = Nil |
| C | Property £ 40,000 + £40,000 = £80,000 | Goodwill Nil + Nil = Nil |
C is treated as having acquired his 1/3 interest for an amount equal to the disposal consideration taken into account for A and B.
Note that the £50,000 capital introduced to the partnership by C does not feature in the CG computation as it was credited to his capital account. It was not a payment made directly or indirectly between the partners.
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.
»Ê¹ÚÌåÓýapp 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.
»Ê¹ÚÌåÓýapp CG base costs for A and B are:
| - | Property |
|---|---|
| A | Property £240,000 x 1/2 = £120,000 |
| B | Property £240,000 x 1/2 = £120,000 |
»Ê¹ÚÌåÓýapp surplus on revaluation, (£300,000 - £240,000) £60,000 was credited to A and B’s capital accounts in proportion to their fractional interests:
| - | Calculation |
|---|---|
| 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.
»Ê¹ÚÌåÓýapp surplus on disposal of £600,000 - £300,000 = £300,000 is credited to the partnersâ€� capital accounts as to:
| - | Calculation |
|---|---|
| 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.
Section 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:
| - | Freehold property |
|---|---|
| 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
»Ê¹ÚÌåÓýapp partnersâ€� CG computations will be calculated in accordance with section 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:
| - | Amount |
|---|---|
| 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:
| - | Amount |
|---|---|
| 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 |
»Ê¹ÚÌåÓýapp 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.
Example 3: Payments between partners on the admission of a new partner
Facts
A and B carry on a business in partnership and hold equal interests in partnership assets.
»Ê¹ÚÌåÓýapp only chargeable asset of the partnership consists of goodwill which is not included in the balance sheet. As there were no costs of acquisition for goodwill the partnersâ€� CG base costs are nil.
Disposals
1) On the admission of C to the partnership the sharing ratios are changed to 1/3 each.
On joining C makes a capital contribution to the partnership of £40,000 which is credited to his capital account. In addition he makes a direct payment of £25,000 to each of A and B for his acquisition of an interest in goodwill.
2) Five years later the partners decide to sell their business as a going concern to a third party. »Ê¹ÚÌåÓýapp disposal consideration for goodwill is £270,000.
Analysis
1) Admission of C
»Ê¹ÚÌåÓýapp CG computations for the part-disposals of A and B’s interests in goodwill based on section 4 of SP D12, see CG27500, are:
| - | Partner A | Partner B |
|---|---|---|
| Disposal consideration based on BSV | - | - |
| Nil x 1/6 = Nil | - | - |
| Plus consideration from C-£25,000 | £25,000 | £25,000 |
| Less | - | - |
| Acquisition cost | - | - |
| Nil x 1/3 | Nil | Nil |
| Gain | £25,000 | £25,000 |
CG base costs to carry forward:
| - | Calculation |
|---|---|
| A | Nil � Nil = Nil |
| B | Nil � Nil = Nil |
| C | £25,000 + £25,000 = £50,000 |
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 goodwill for £270,000
Section 2 of SP D12 applies to the calculation of the gains, see CG27350:
| - | Partner A | Partner B | Partner C |
|---|---|---|---|
| Disposal consideration | - | - | - |
| £270,000 x 1/3 | £90,000 | £90,000 | £90,000 |
| Less | - | - | - |
| Acquisition cost | Nil | Nil | £50,000 |
| Gains | £90,000 | £90,000 | £40,000 |
Note that:
Partner A’s gains (£25,000 + £90,000) £115,000 are equal to:
| - | Amount |
|---|---|
| Consideration received from Partner C | £25,000 |
| Surplus on sale £270,000 x 1/3 | £90,000 |
| - | £115,000 |
Partner B’s gains (£25,000 + £90,000) £115,000 are equal to:
| - | Amount |
|---|---|
| Consideration received from Partner C | £25,000 |
| Surplus on sale £270,000 x 1/3 | £90,000 |
| - | £115,000 |
Partner C’s gain of £40,000 is equal to:
| - | Amount |
|---|---|
| Surplus on sale £270,000 x 1/3 | £90,000 |
| Less consideration paid to A and B | £50,000 |
| - | £40,000 |
»Ê¹ÚÌåÓýapp total gains (£25,000 + £25,000 + £90,000 + £90,000 + £40,000) £270,000 are equal to the overall gain arising on the disposal of goodwill (disposal proceeds £270,000 â€� acquisition cost nil) £270,000.
Example 4: A partner leaves after assets have been revalued
Facts
A, B and C carry on a business in partnership and hold equal interests in partnership assets.
»Ê¹ÚÌåÓýapp partnership’s chargeable assets consist of freehold property which it acquired for £600,000 but which, following a revaluation, is included in the balance sheet at a value of £900,000 and goodwill which it acquired for £300,000 but which has been written down in the balance sheet to £210,000.
»Ê¹ÚÌåÓýapp surplus and deficit on the revaluations were credited and debited to each of the partnersâ€� capital accounts as to:
Property £900,000 - £600,000 = £300,000 x 1/3 = £100,000
Goodwill £210,000 - £300,000 = (£90,000) x 1/3 = (£30,000)
»Ê¹ÚÌåÓýapp CG base costs of the partners are:
| - | Property | Goodwill |
|---|---|---|
| Partner A | Property £600,000 x 1/3 = £200,000 | Goodwill £300,000 x 1/3 = £100,000 |
| Partner B | Property £600,000 x 1/3 = £200,000 | Goodwill £300,000 x 1/3 = £100,000 |
| Partner C | Property £600,000 x 1/3 = £200,000 | Goodwill £300,000 x 1/3 = £100,000 |
Disposals
1) On B’s retirement from the partnership the sharing ratios are changed to:
- Partner A - 1/2
- Partner C - 1/2
»Ê¹ÚÌåÓýapp balance on B’s capital account was repaid to him but he did not receive any direct consideration from A and C for the disposal of his 1/3 interest in the freehold property and goodwill.
2) Three years later A and C decide to retire. »Ê¹ÚÌåÓýappy sell the business as a going concern. »Ê¹ÚÌåÓýapp disposal consideration includes:
| - | Amount |
|---|---|
| Freehold property | £960,000 |
| Goodwill | £360,000 |
»Ê¹ÚÌåÓýapp surpluses on disposal were credited to the partnersâ€� capital accounts as to:
Property
| - | Calculation |
|---|---|
| Partner A | (£960,000 - £900,000) £60,000 x 1/2 = £30,000 |
| Partner C | (£960,000 - £900,000) £60,000 x 1/2 = £30,000 |
Goodwill
| - | Calculation |
|---|---|
| Partner A | (£360,000 - £210,000) £150,000 x 1/2 = £75,000 |
| Partner C | (£360,000 - £210,000) £150,000 x 1/2 = £75,000 |
Analysis
1) Retirement of B
»Ê¹ÚÌåÓýapp CG computations for the disposal of B’s 1/3 fractional interest based on section 4 of SP D12, see CG27500, will be:
| Partner B | Property | Goodwill |
|---|---|---|
| Disposal consideration based on BSV | - | - |
| Property £900,000 x 1/3 | £300,000 | - |
| Goodwill £210,000 x 1/3 | - | £ 70,000 |
| Less Acquisition cost | £200,000 | £100,000 |
| - | Gain £100,000 | Loss £30,000 |
Note that B’s gain and loss are equal to his one-third share of the surplus/deficit on revaluation of the assets:
Property £900,000 - £600,000 = £300,000 x 1/3 = £100,000
Goodwill £210,000 - £300,000 = (£90,000) x 1/3 = (£30,000)
CG base costs to carry forward:
Partner A
| - | Calculation |
|---|---|
| Freehold property | £200,000 + (£300,000 x ½) £150,000 = £350,000 |
| Goodwill | £100,000 + (£70,000 x ½) £35,000 = £135,000 |
Partner C
| - | Calculation |
|---|---|
| Freehold property | £200,000 + (£300,000 x ½) £150,000 = £350,000 |
| Goodwill | £100,000 + (£70,000 x ½) £35,000 = £135,000 |
2) Sale of business
Section 2 of SP D12 applies to the calculation of the gains arising to A and C, see CG27350.
| - | Partner A | - | Partner C | - |
|---|---|---|---|---|
| - | Property | Goodwill | Property | Goodwill |
| Disposal consideration | - | - | - | - |
| Property £960,000 x 1/2 | £480,000 | - | £480,000 | - |
| Goodwill £360,000 x 1/2 | - | £180,000 | - | £180,000 |
| Less Acquisition cost | £350,000 | £135,000 | £350,000 | £135,000 |
| Gains | £130,000 | £45,000 | £130,000 | £45,000 |
Note that the partners� gains are equal to:
Property
Share of surpluses on revaluation and sale £100,000 + £30,000 = £130,000.
Goodwill
Share of surplus on sale less deficit on revaluation £75,000 - £30,000 = £45,000.
»Ê¹ÚÌåÓýapp overall gains on the property are equal to the profit arising on sale £960,000 â€� cost £600,000 = £360,000:
| - | Amount |
|---|---|
| Partner A | £130,000 |
| Partner B | £100,000 |
| Partner C | £130,000 |
| - | £360,000 |
»Ê¹ÚÌåÓýapp overall gains less losses on goodwill are equal to the profit arising on sale 360,000 â€� cost £300,000 = £60,000:
| - | - | Amount |
|---|---|---|
| Partner A | Gain | £45,000 |
| Partner B | Loss | £30,000 |
| Partner C | Gain | £45,000 |
| - | - | £60,000 |