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bigduckontax
bigduckontax, Accountant
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The Scenario • 2 brothers were gifted 25% each of a share

Customer Question

The Scenario
• 2 brothers were gifted 25% each of a share in a partnership in 2005/06 and again in 2006/07 by their parents. They now hold 50% each. The partnership owns residential and commercial property and rents it out. The gifts were deemed to be at market value at the time, and no hold over reliefs were claimed .
• One of the brothers wants to exit the partnership, taking 3 property assets as settlement. Simultaneously, he will gift his share in the partnership to the remaining partner's wife, to ensure that the partnership can continue.
• The vacating partner ultimately wants to put the properties into a limited company. This can be done before, after or at the time of vacation.
The Issues
• What are CGT considerations going on?
1. Vacating partner selling his share in the partnership, for the consideration of 3 properties?
2. Partnership selling the 3 properties to vacating partner, or to his limited company first, then leaving the partnership by gifting the share in the partnership to remaining partner's wife?
3. Are there any hold over relief available?
The Problem
• What is the best way to structure this and limit the CGT exposure.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Acquisition by gift - no CGT involved [for the donor a disposal under the CGT regime is created]. The brother's exit is a disposal for CGT whichever way he engineers it. The gain will be the consideration at current market value less the value of the gifts also at current market value at the time of the gift. However, he will be entitled to Entrepreneurs' Relief which will tax the gain at a flat rate of 10% instead of the usual 18% or 28%. Gillespie and Anderson Chartered Accountants have the following pithy advice regarding hold over relief: 'To many people’s surprise, there is no general relief that prevents a chargeable gain from arising on a gift by reference to the market value of the asset. If the asset is a business asset, the gain can be deferred if the donor and donee choose.' Use of this relief merely throws the liability for the donor's CGT on disposal on to the beneficiary, hence the requirement for agreement. I do hope that I have shed some light on the position.
Customer: replied 1 year ago.
HiThanks for the response.For clarity -The Partnership deals in renting residential & commercial property. Two of the commercial properties are rented out the the partners individually owned limited companies.Rents less expenses are reported to HMRC on Partnership UK Property pages.Are the properties in question definately considered Business Assets thus getting Entrepreneurs relief?I assume it is the vacating partner that is making the disposal for CGT purposes?I assume that the total value of the property assets taken to give up his share in the partnership is the consideration?This is reduced by the market value at the time of the original gift, plus capitalised refurbishment works?There is no other transaction to consider, as the remaining partner's wife will assume the stake in the partnership moving forward, to enable the partnership to continue.
Expert:  bigduckontax replied 1 year ago.
I am of the opinion that the relief will apply in view of the substantial portion of the business these assets comprise. You are correct in your assessment of the consideration, which must be at current market value. Refurbishment work is not allowable against the CGT computation, but against rental income. For CGT purposes expenditure on improvements eg installation of double glazing, central heating, extensions etc reduces the gain by inflating the acquisition price. Please be so kind as to rate me before you leave the Just Answer site.
Customer: replied 1 year ago.
ThanksCan you please confirm the 2 points below.I assume it is the vacating partner that is making the disposal for CGT purposes?Is there is no other transaction to consider, as the remaining partner's wife will assume the stake in the partnership moving forward, to enable the partnership to continue?Many Thanks
Expert:  bigduckontax replied 1 year ago.
Correct.
She will assume her stake at the current market value as applicable for the retiring partner's CGT computation.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3389
Experience: FCCA FCMA CGMA ACIS
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 1 year ago.
Thanks for your guidance. Much appreciated.
Expert:  bigduckontax replied 1 year ago.
Delighted to have been of assistance.
Thank you for your excellent support.

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