I would be grateful for some assistance with the following CGT calculation please:
In March 1988, Partner 1 & Partner 2 jointly purchased a commercial premises for £235,000 from which they commenced to trade. In January 2002, the spouses of partner 1 & partner 2 joined the partnership.
In October 2004, husband and wife, partner 1 & partner 3 purchased the property and goodwill from partners 2 & 4. The amount paid was: Goodwill £212,500, Retiring partner's capital account balance £1,649 and £287,500 for the property.
In August 2013, partners 1 & 3 sold the property for £460,000 and the goodwill for £40,000. The profit sharing ratios were partner (60%) and partner 3 (40%)
My draft calculation is:
Partner 1: (60%) Partner 3: (40%)
Property - Cost £290,000 Property - Cost £115,000
Proceeds £276,000 Proceeds £184,000
Loss £14,000 Gain £69,000
Goodwill - Cost £127,500 Goodwill - Cost £85,000
Proceeds £24,000 Proceeds £16,000
Loss £103,500 Loss £69,000
Phew!!
Thank you in anticipation.
Replies (6)
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Cost
How have you got cost of £405,000 (£290k + £115k) on the property for Partners 1 & 3 when they paid a total of £287,500 for it?
Because
Partner 1 originally paid half of £235k (£117,500) and then purchased the other half from partner 2 for £287,500.
My question with regards the property then is that does partner one not hold 75% of the property, being his original 50% + half of the second 50% ?
Or were the title deeds for the second 50% purchase put soley in the name of his wife?
What proportion did partner 3 own?
Your calculations suggest that partner three has a base cost for the property of £115,000, being 40% of the half purchased from partners 2 and 4. Partner 3 has therefore purchased only 20% of the property (40% x half). You have, however, allocated 40% of the full proceeds to partner 3.
You need to confirm whether, on joining the partnership, partner 3 took on part ownership of the property. If so, your base cost needs to reflect this, otherwise, you have allocated too much proceeds.
It is possible for the capital assets to be owned in differing proportions to the profit sharing ratio.