Depreciating asset hold-over & partnership change

Partnership sells an asset, reinvests in a depreciating asset, then partner reduces his share. CGT?

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A partnership sold an asset and reinvested in a depreciating asset. We are going to claim hold-over under S154 TCGA. What will happen when a partner reduces his share in the partnership's capital assets in future?  Will he trigger CGT each time he reduces his share, or will no gain be triggered until he retires (or after 10 years elapse). 

Say he has a 30% share now, so he is deemed to have 30% of the new depreciating asset.  If he reduces his share to 20%, will he be deemed to have ceased to use 10% for the business and have to pay tax on 1/3 of the held-over gain? 

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By Tax Dragon
13th Jun 2018 18:26

Yes. That outcome follows from SP D12 para 4.

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By Alastair Johnston
14th Jun 2018 12:21

Thanks, Tax Dragon. At first blush that seems to be what D12 says, and that would be a good result for the client because he could gradually reduce his share over a few years and crystallise small gains each year without incurring any CGT.

However D12 does not touch on the particular point, so I am not sure that it is safe to draw that conclusion. He would be deemed to dispose of "part of the whole of his share". S21 TCGA says that a disposal includes a part disposal (except where the context otherwise requires). You could argue that therefore "disposes" in S154 includes the D12 deemed part disposal, and the entire held-over gain falls into charge on the first part disposal. That would be a harsh interpretation, so the context does not require it. (I suppose I would say that, wouldn't I?) And D12 is not law anyway.

Compare with S116(10). Company disposal, you exchange shares for Loan Notes. Your gain on the shares is held over until the disposal of the new asset, the LNs. S116(10) specifically provides that a part disposal of the new asset crystallises a corresponding part of the gain on the old asset. S154 does not do this, so it seems to me that it is open to HMRC to argue that there is no similar drip-feeding of the held-over gain back into the charge to tax. So the S154 charge is not triggered until the complete disposal of asset No 2. Or indeed, the harsh view set out above. Either one would be bad for my client.

S42 only deals with costs and doesn't affect the S154 point either.

So I am just a wee bit nervous! Should I be? Has anyone seen this in practice?

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Replying to Alastair Johnston:
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By Tax Dragon
14th Jun 2018 15:00

I see your point. You seem to have spotted a gap in the legislation.

S154 is clear that the gain comes back into charge when the claimant disposes of asset No.2. That's when he leaves the partnership. I disagree your interpretation of s21. There may be disposals when he reduces his profit share. But he hasn't, at that time, disposed of the asset.

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Replying to Alastair Johnston:
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By Tax Dragon
14th Jun 2018 15:05

Just a passing thought... have you considered ER, if the disposal is on leaving the partnership? Could it be a double whammy?

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