Capital Gains Tax and Corporation Tax on chargeable gains: contribution of assets to a partnership

This Revenue and Customs Brief clarifies HMRC's practice in relation to the treatment for capital gains purposes of a contribution of an asset to a partnership.Statement of Practice D12 (SoP D12) was published on 17 January 1975 following discussions with the Law Society and the allied accountancy bodies and sets out our understanding of how the legislation concerning the tax treatment of partnerships works in practice. It has been updated since 1975. It does not, however, deal with the situation where a partner contributes an asset to a partnership by means of a capital contribution.

We consider that, where an asset is transferred to a partnership by means of a capital contribution, the correct application of the capital gains legislation is that the partner in question has made a part disposal of the asset equal to the fractional share that passes to the other partners.

The market value rule would apply, if the transfer is between connected persons or the transaction is other than by way of a bargain made at arm's length, Otherwise, the consideration to be taken into account in computing the chargeable gain or loss on the part disposal will be a proportion of the total consideration given by the partnership for the asset. That proportion will be equal to the fractional share of the asset passing to the other partners. We take the view that a sum credited to the partner's capital account represents consideration for the disposal of the asset to the partnership.

Although the situation is similar in some respects to a change in partnership sharing ratios, it is not possible to calculate the disposal consideration on a capital contribution by reference to paragraph 4 of SoP D12, as the asset in question would not have a balance sheet value in the partnership accounts. It has been our practice, however, to accept the apportionment of allowable costs on a fractional basis as provided for in paragraph 4, rather than by reference to the statutory A/A + B formula.

A gain will arise on a contribution of an asset where the disposal consideration, calculated by reference to a fractional proportion of the total consideration or, in appropriate cases, a proportion of the market value of the asset, exceeds the allowable costs based on a fraction of the partner's capital gain base costs.

It has been brought to our attention that in the past individual HMRC (previously Inland Revenue) officers may have erroneously applied paragraph 4 of SoP D12 more widely than was justified where an asset was contributed to a partnership. We apologise if this has resulted in a misunderstanding of our practice in this area. In our view these previous applications of SoP D12 were incorrect and inconsistent with statements made by other HMRC officers. We will consider ourselves bound by statements made in individual cases. In cases where we are not bound, including all future cases, the correct treatment as described above will be applied.