Where assets have been contributed to a partnership, partners have, in the past relied on Statement of Practice D12. This Statement treated the assets as contributed on a no gain, no loss basis.
This meant that the partner was not treated as making a disposal, even though the asset was credited to his capital account at market value, rather than cost.
There was no charge, except in the situation where there was a change in profit sharing ratios, combined with either a revaluation of assets or a payment of cash outside the partnership accounts.
The contribution of assets on formation of a partnership was not explicitly dealt with by D12, but had become established practice.
This has now changed. HMRC has issued Revenue & Customs Brief 03/08 (PDF - opens in a new window) which states that a partner contributing an asset to a partnership is making a part disposal equal to the fractional share that passes to the other partners.
This is the treatment already adopted by Stamp Duty Land Tax legislation for contributions of land.
Section 17 TCGA 1992 provides that market value is to be applied where the transfer is between connected persons or is a bargain otherwise than at arm's length. Thus market value contributions where the market value is greater than the partner's base cost, will give rise to a chargeable gain. Rollover relief under Section 152 would be available where the asset is disposed of on contribution to a partnership and the taxpayer acquires an interest in another asset.
Case law* has established that, 'where property is put into a pool, and the result is that the interests precisely reflect the individual's interests beforehand, there is no disposal for Capital Gains Tax. However, the case relates to pooling assets in a trust and HMRC have stated that they do not consider this to be relevant to a partnership.
The position is not free from doubt, but HMRC have left no doubt as to their future intentions. Where taxpayers have received specific clearance, HMRC have stated that they will be bound by that clearance. More commonly, where taxpayers have relied on established practice, they are vulnerable to reappraisal by HMRC.
* Booth v Ellard [1980] STC 555.
[26/03/08]