Partnerships can be tax-efficient, but when it comes to Capital Gains Tax (CGT), the rules are not always straightforward. Unlike companies, partnerships don’t pay tax in their own right. Instead, gains and losses flow through to the individual partners.
This guide pulls together the key principles, HMRC’s Statement of Practice D12, and some practical examples to show how CGT applies when assets are sold, partners join or leave, or when assets are revalued.
1. Partnerships and CGT – The Basics
The Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit.”
For CGT, section 59 of TCGA 1992 makes it clear that:
- Partnerships do not pay CGT directly.
- Gains are assessed on the individual partners.
- Each partner pays tax on their share of the gain.
The partnership tax return shows how gains are split, but each partner reports their share on their own self-assessment.
This applies when:
- Assets are sold,
- Partners join or leave,
- Assets are distributed, or
- Profit/capital-sharing ratios change.
2. HMRC’s Statement of Practice D12
HMRC’s SP D12 sets out how CGT applies to both general and limited liability partnerships. The key rule:
Each partner is treated as owning a fractional share of every partnership asset.
Example – Valuation of Shares
Four equal partners own property worth £120,000. Each partner’s share is:
25% × £120,000 = £30,000
No “minority discount” is allowed, even though a 25% stake might be worth less in the open market.
3. Selling Partnership Assets
When a partnership sells an asset, each partner is treated as selling their share.
- Proceeds are split by capital-sharing ratios.
- Acquisition costs are also allocated in the same way.
- Each partner reports their individual gain or loss.
Example – Sale of a Partnership Office
Sarah (70%) and James (30%) sell a partnership office bought for £120,000 for £600,000.
- Sarah: £420,000 (70% of sale price) – £84,000 (70% of purchase price) = £336,000 gain
- James: £180,000 – £36,000 = £144,000 gain
Each is taxed separately and can claim reliefs individually.
4. Distributing Partnership Assets
When an asset is transferred to a partner (e.g., on retirement or dissolution), it stops being partnership property and becomes wholly theirs.
- The partners giving up shares are taxed on their gains.
- The receiving partner is not taxed immediately, but their base cost is adjusted.
Example – Asset Transfer on Retirement
Amelia, Ben, and David share profits 50%, 30%, 20%. The partnership building, bought for £100,000, is now worth £500,000. When David retires, the building is transferred to him.
- Amelia: £250,000 – £50,000 = £200,000 gain
- Ben: £150,000 – £30,000 = £120,000 gain
- David: £100,000 – £20,000 = £80,000 notional gain (not taxed)
David’s base cost = £500,000 – £80,000 = £420,000.
Amelia and Ben – these gains are taxable on them unless gift hold-over relief under TCGA 1992 s.165 is claimed.
Example – Asset Transfer at a Loss
David, Emma, and Sue share 40%, 35%, 25%. The partnership office bought for £500,000 is now worth £300,000 and transferred to Sophia.
- David: £120,000 – £200,000 = £80,000 loss
- Emma: £105,000 – £175,000 = £70,000 loss
- Sue: £75,000 – £125,000 = £50,000 notional loss
David and Emma can offset their losses. Sue’s base cost increases:
£300,000 + £50,000 = £350,000
