Partners are taxed on partnership gains as if each owned a fraction of every partnership asset. Section 59 of the Taxation of Chargeable Gains Act 1992 (section 59A for LLPs) treats the firm’s dealings as dealings by the partners, and HMRC’s Statement of Practice D12 explains how the fractions are measured and what happens when they change. A partner whose share falls, including when someone joins or leaves, makes a part disposal, but if the assets stand in the accounts at cost and no money changes hands outside the accounts, the usual result is no gain and no loss.
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Why is a partner taxed on a share of each asset?
Section 59 TCGA 1992 says partnership dealings in chargeable assets are treated as dealings by the partners, and section 59A applies the same rule to a limited liability partnership. CG27150 summarises the effect: gains are charged on the partners, not the firm, and there is a disposal either when the partnership disposes of an asset or when a partner’s fractional interest in an asset is reduced.
SP D12 was first issued on 17 January 1975 after discussions with the Law Society and the accountancy bodies. It was rewritten in 2015 after the Office of Tax Simplification concluded that it gives a reasonable result in most cases. It is a statement of practice, not law, but HMRC applies it, and the Capital Gains Manual at CG27000 onwards gives worked examples. It does not apply to an LLP that has ceased to be transparent under section 59A. Who owns what in the first place is covered in partnership property and goodwill.
How is each partner’s fraction measured?
Paragraph 2 of SP D12 allocates disposal proceeds between partners in their ratio for sharing asset surpluses at the time of the disposal. Where the agreement does not set an asset surplus ratio, the allocation follows where the surplus actually goes in the accounts, taking account of any agreement outside them. If the surplus is put to a common reserve, the ordinary profit sharing ratio is used. Acquisition costs are allocated on the same principles when the asset is bought, and adjusted when the ratios later change.
When a partner’s share has to be valued, paragraph 1 says it is a straight fraction of the value of the whole partnership interest, with no discount for the size of the share. A partner with one tenth of a partnership holding of all the shares in a company holds one tenth of the value of a 100% holding.
A partner who builds up a share in stages pools the cost of each asset (paragraph 11). HMRC will review results that look unreasonable where a departure and an arrival are a few months out of step.
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What happens when the sharing ratios change?
Paragraph 4 treats a change in sharing ratios, including one caused by a partner joining or leaving, as an occasion of charge. The partner whose share of asset surpluses falls disposes of part of their share in each partnership asset; the partner whose share rises acquires it. The disposal consideration is the fraction changing hands multiplied by the current balance sheet value of each chargeable asset, provided nothing is paid outside the partnership.
The cost of the part disposed of is also worked out on a fractional basis. Paragraph 4.4 says the normal part disposal formula in section 42 TCGA 1992, A divided by A plus B, is not used. Because both sides are calculated from the same balance sheet figure, an asset carried at cost usually gives neither a gain nor a loss. Paragraph 4.2 warns this will not happen where the asset has been revalued, where a partner contributed it at a figure different from their base cost, or where base costs came from a no gain no loss transfer under section 171.
How do revaluations and payments outside the accounts create gains?
Revaluations
Revaluing an asset in the accounts is not itself a disposal, but it credits each partner’s capital or current account with their share of the uplift. Paragraph 6 says that if a partner’s share later falls, they are treated as disposing of the fraction given up for that fraction of the revalued amount. HMRC’s example at CG27540 has partners A and B owning a property 50:50, bought for £400,000 and revalued to £600,000. When their shares change to 40:60, A disposes of 10% for £60,000 (10% of £600,000) against a cost of £40,000 (£200,000 multiplied by 10/50), a gain of £20,000. B’s base cost rises by £60,000.
Payments outside the accounts
Under paragraph 7, a payment made directly between partners on a change of ratios is extra consideration for the share disposed of. It is often for goodwill not shown in the balance sheet. The partner receiving it has no base cost to set against it unless they paid for their own share, and the partner paying it adds it to their cost, deductible when they later reduce their share or leave. Payments into the firm on joining, and how they are recorded, are covered in partnership capital and current accounts.
Where nothing is paid, paragraph 8 says a charge arises only if the transaction is not at arm’s length. Section 286(4) stops partners being connected persons for genuine commercial arrangements over partnership assets, and HMRC extends that to incoming partners. Market value can be substituted where partners are connected in another way, such as a parent and child, but not if nothing would have been paid at arm’s length anyway.
What if an asset goes into or comes out of the firm?
- Contributions. Paragraph 5, added in 2015 from Revenue and Customs Brief 03/08, treats a partner who contributes an asset as making a part disposal of the fraction passing to the other partners. The consideration is that fraction of the amount credited to their capital account, or of market value if the parties are connected or not at arm’s length.
- Distributions in kind. Under paragraph 3, when the firm hands an asset to a partner, for example on dissolution, gains are first computed as if it were sold at market value. Partners who do not receive the asset are taxed on their share; the partner who receives it is not, but takes a base cost of market value less their share of the gain.
- Mergers. Paragraph 10 applies the sharing ratio rules where two firms merge, and roll over relief under section 152 may be claimed by continuing partners on any gains.
How does a new partner joining work through?
Illustration only. Ana and Ben share all profits and asset surpluses equally. The firm’s premises are in the balance sheet at their £300,000 cost, so each has a base cost of £150,000. Goodwill is not in the balance sheet. Cara joins and the ratios become 40:40:20.
| Step | Ana | Ben | Cara |
|---|---|---|---|
| Fraction of premises disposed of or acquired | 10% out | 10% out | 20% in |
| Consideration (fraction of £300,000 balance sheet value) | £30,000 | £30,000 | £60,000 cost |
| Cost of part disposed (£150,000 multiplied by 10/50) | £30,000 | £30,000 | n/a |
| Gain on premises | Nil | Nil | n/a |
| Base cost carried forward | £120,000 | £120,000 | £60,000 |
If Cara also pays Ana and Ben £25,000 each personally for a share of goodwill, each makes a £25,000 gain with no cost to deduct, and Cara’s goodwill cost is £50,000. Had the premises been revalued to £500,000 before Cara joined, Ana and Ben would each be treated as receiving £50,000 for their 10% and make gains of £20,000.
Which reliefs can apply?
Paragraph 14 confirms that partners can claim the main business reliefs on their fractional disposals, subject to the normal conditions: Business Asset Disposal Relief on disposing of all or part of a partnership business, roll over relief where proceeds of a partnership asset are reinvested, incorporation relief where the whole business passes to a company for shares, and gift holdover relief under section 165.
What mistakes come up most often?
- Assuming a change in ratios is never taxable, when a past revaluation or a side payment creates a gain.
- Using the A divided by A plus B formula instead of the fractional basis.
- Not keeping a record of each partner’s base cost in each asset, which makes later disposals hard to compute.
- Ignoring payments made between partners personally because they never pass through the firm’s books.
- Forgetting that the incoming partner’s cost is the consideration taken into account for the outgoing partners.
Income tax on profit shares when partners change is a separate question, covered in partners joining and leaving.
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Related Accountapedia entries
- Gifts and market value for capital gains
- Capital gains for unmarried couples
- Gifting shares in a family company: CGT
- Part disposals: the A over A plus B formula
- Gifting a mortgaged property: the CGT effect
- How partnership profits are shared for tax
Sources
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.