Partnership CGT?

Partnership CGT?

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Should be a basic question but I am struggling this morning with this.

A partnership (farming) has three equal partners. P1, P2 and P3.

P1 is retiring, P2 and P3 are continuing on in partnership equally.

The partnership owns 3 farms (F) and 1 farm cottage (FC).  Values are as follows F1 £800k, F2 500k, F3 £350k and FC £300k.

The partners have agreed that P1 will take his capital account + 1/3 of the values of the partnership assets.  As part of this P1 will walk away with the FC.

What is the CGT position of the three partners?

What about plant and equipment?  If the NBV is say £10k but market value is £50k what would be the tax position if P1 received 1/3 of the uplift in respect of plant?

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By MBK
02nd Jun 2011 13:10

I would suggest that the basic deal needs to be revisited first

Surely the partner leaving should go for the balance on his capital account plus 1/3rd of the uplift in the value of the partnership assets from their carrying cost in the accounts. Otherwise he gets two bites of the original cost cherry.

The way to approach this is just to revalue everything in the partnership accounts and credit the uplift to the capital accounts - presumably in equal shares. No tax consequences doing this.

The tax consequence arises as a result of the partner leaving - at which point he makes a CGT disposal of his interest in the farm's chargeable assets - ie the farms and the farm cottage. However, he is taking the cottage in part payment, so no disposal for him there. The effect is that the oputgoing partner will have gains arising on his share of the three farms. The continuing partners will have gains arising on their disposal of their interests in the farm cottage.

There may, possibly, be a measure of relief from CGT if you can get the exchange within the terms of the relief for exchange of joint interests in land as set out in TCGA92 Ss 248A - 248D. This will need research.

The revaluation of plant is irrelevant unless the revaluation is to an amount in excess of original cost - unlikely. Assuming less than cost this is just a reversal of previous depreciation charges which have been debited to the partners' capital accounts in earlier years. If those debits were unequal there is a case for making the revaluation unequal also to match.

 

 

 

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