Q: In a trading partnership, what happens when one of the partners decides to leave the partnership and the remaining partner continues the business as a sole trader? A payment has been agreed for the outgoing partner which includes amounts for various items but mainly consists of plant and machinery. How does this element of the payment affect the capital allowances claim?


A: Although the partnership will be ceasing and a sole trade commencing, the business will be treated as continuing for tax purposes if the same business is being carried on. If so, there will be no adjustments required for capital allowances purposes. Separate accounts for the partnership and the “new” sole trade may be required, but this does not directly affect the tax treatment.

Whether the same business is carried on is a question of fact depending on the particular circumstances involved. HMRC have some helpful information on business changes in their Business Income Manual at BIM80500 and BIM80635 comments on changes in the business owners.

As far as the legislation is concerned, s61 CAA 2001 covers “disposal events and disposal values” and includes a table of events and the disposal values to use. If the same business is continuing, albeit with a change in the owners, the change occurring here will not fall within the disposal events listed in s61(1) and so no capital allowances event has occurred. As the continuing business already owns the plant and machinery, no plant additions have been made.

Although a legal interest in a partnership is an asset in its own right, HMRC practice is outlined in their Statement of Practice SPD12 (see HMRC’s Capital Gains Tax Manual page CG27170). Instead of treating the partnership interest as an asset for capital gains tax purposes, HMRC treats each partner as owning a fractional share of the partnership’s chargeable assets. Therefore, although the valuation methodology may involve the various components of the business involved, capital gains tax will generally involve a deemed disposal of property interests with any balance of consideration deemed to be business goodwill.


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