Disposal of partnership interest and CGT

Disposal of partnership interest and CGT

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Mr A is a partner in a 5 person partnership, each with equal capital, profit sharing and broadly simialr current accounts. There is no goodwill on the balance sheet.

The partnership is seeking to admit 3 new partners, but rather than continue with the existing structure would like to change its recognition of goodwill and to do this is seeking to form a brand new 8 person partnership which will buy the trade and goodwill from the 5 person partnership.

Due to the changes in entrepreneur's relief and associated disposals, and since this is not a fractional disposal within the existing partnership it is not clear whether entrepreneur's releif is available, if the each partners' share went from 20% each to 12.5% each.

Perhaps more fundamental, we are receiving conflicting views as to whether if the new partnership recognises the full value of goodwill, if this can be treated as a capital disposal for the full value (rather than fractional disposal). Even if entrepreneur's relief is not available, CGT on a full disposal is beneficial at 20%. Our view however is that the full value can't be recognised / treated as a disposal since it is, in effect, a "disposal" to themselves as unincoporated entities, and that only incorporation to a limited company could have this affect.

AW contributor's views are welcome.


Replies (3)

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By johngroganjga
15th Aug 2016 11:10

From what you say each of the five existing partners is disposing of 3/8 of his or her goodwill for a consideration equal to the appropriate portion of the value agreed with the incoming partners, assuming they are unconnected.

How much, if any, of the goodwill they choose to recognise in the partnership balance sheet going forward is entirely a matter for them, and has no effect on the tax consequences of the part disposal you describe.

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15th Aug 2016 14:19

Agree with what @JohnG says. Conventionally you would recognise the goodwill in the balance sheet at the amount implicit in what the new partners are paying to buy in and route the funds through the partners capital accounts to keep track for the future. But it could be done off balance sheet too if that was what they wanted.

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By johngroganjga
16th Aug 2016 08:02

The conventional way of accounting for the transfer is immediately before the admission of the new partners to credit the existing partners with the full agreed value of the goodwill in the agreed proportions - the debit obviously to goodwill on the balance sheet. Then admit the new partners. Then decide whether as a matter of accounting policy the new partnership wishes to carry goodwill on its balance sheet. If so, do nothing. If not, write it off against the capital accounts of all the partners' in the new agreed proportions.

Those are the book-keeping entries. In parallel with those there may be introductions and withdrawals of cash, if, for example, the partners wish to equalise their capital accounts.

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