BADR for Partners

Key facts

A partner disposes of a fractional share of each partnership asset, not a single “interest” in the partnership.
BADR is available at 10% on qualifying partnership disposals, subject to the £1m lifetime limit.
The partner must have been a partner for at least 2 years before the disposal.
A retiring partner must be disposing of the whole of their interest in the partnership business.
Goodwill in a partnership has a nil base cost for each partner’s share (if self-generated).

How Partnership CGT Works

A partnership is transparent for Capital Gains Tax purposes. This means the partnership itself is not taxed; instead, each partner is treated as owning a fractional share of each partnership asset.^[1]

When a partnership asset is disposed of, each partner is treated as disposing of their individual fractional interest. For example, if a two-person equal partnership sells a property for £400,000, each partner is treated as disposing of a £200,000 asset.

Fractional Interests in Assets

Each partner’s fractional interest in a partnership asset is determined by their asset-sharing ratio — which may differ from their profit-sharing ratio. If the partnership agreement does not specify an asset-sharing ratio, it is usually assumed to follow the profit-sharing ratio.^[2]

Key points about fractional interests:

Each partner’s base cost is their share of the original cost (or market value at the date they became a partner, if they were not an original partner)
Enhancement expenditure is allocated according to the asset-sharing ratio at the time the expenditure was incurred
Changes in sharing ratios can create disposals (though Statement of Practice D12 provides a concession in many cases)

BADR Conditions for Partners

A partner can claim Business Asset Disposal Relief (BADR) at 10% on qualifying gains. The conditions mirror those for sole traders, with partnership-specific rules:^[3]

Sale of the Partnership Business

The partnership must be disposing of the whole or a distinct part of its business
The partner must have been a partner for at least 2 years
The partnership must have been carrying on a genuine trade

Retirement from a Partnership

The retiring partner must dispose of the whole of their interest in the partnership
The partner must have been a partner for at least 2 years
The partnership must be a trading partnership

Disposal of Individual Assets After Cessation

The partnership must have ceased trading
The disposal must be within 3 years of cessation
The asset must have been used in the partnership trade at cessation

Statement of Practice D12

SP D12 is an important HMRC concession that governs the CGT treatment of changes in partnership sharing ratios.^[2]

Under SP D12, the following events are not treated as disposals (and therefore do not trigger CGT):

A partner joining or leaving the partnership, where no consideration passes for goodwill
Changes in profit-sharing ratios, provided no payment (other than for a capital contribution or specific asset) is made
A revaluation of partnership assets in the accounts, without any associated payment

However, if consideration passes (for example, a retiring partner receives a payment for their share of goodwill), this triggers a disposal at the amount of the consideration or market value, whichever is appropriate.

Important: SP D12 only applies when the partnership is continuing. If the entire partnership business is sold, normal CGT disposal rules apply to each partner’s fractional share of each asset.

Worked Example: Partner Retirement

A three-person equal trading partnership has the following assets:

Asset	Cost (Total)	Market Value (Total)	Retiring Partner’s 1/3 Share
Goodwill	£0	£450,000	Gain: £150,000
Office property	£300,000	£600,000	Gain: £100,000
Total gains			£250,000

The retiring partner (who has been a partner for 8 years) claims BADR:

Total gains: £250,000
Less Annual Exempt Amount: £3,000
Taxable gain: £247,000
CGT at 10% (BADR): £24,700

Practical Considerations

Annuity payments: If a retiring partner receives an annuity from the continuing partners (rather than a lump sum), the annuity payments may be treated as income rather than capital.
Property in the partnership: If the partnership owns property, the retiring partner’s disposal of their share may trigger a 60-day property CGT report obligation.
LLP members: Members of a limited liability partnership (LLP) are treated as partners for CGT purposes. The same rules apply.
Mixed partnerships: If the partnership includes a company as a partner, the company’s share is dealt with under Corporation Tax rules, not CGT.

Tip: When restructuring a partnership, consider the CGT consequences of changes in asset-sharing ratios. Where possible, structure the changes to fall within Statement of Practice D12 to avoid triggering unnecessary CGT disposals.

Frequently Asked Questions

How is a partnership disposal different from selling a company?

A partnership is transparent for CGT. You do not dispose of “shares” in the partnership. Instead, you dispose of your fractional interest in each individual partnership asset. Each asset is treated as a separate disposal with its own gain or loss calculation.

Can a salaried partner claim BADR?

Only if they are a genuine partner with a share of partnership profits and assets. A “salaried partner” who is in reality an employee (per the salaried member rules in s.863A ITTOIA 2005) may not have a partnership interest to dispose of. The substance of the arrangement determines the tax treatment.

What happens if a partner retires and the others buy out their share?

The retiring partner disposes of their fractional interest in each partnership asset. The remaining partners acquire those fractional interests. BADR is available if the retiring partner is disposing of the whole of their interest and has been a partner for 2+ years.

Does a change in profit-sharing ratio trigger CGT?

It can. If the change means a partner’s fractional share of a chargeable asset (such as property or goodwill) decreases, that is a part disposal. However, HMRC’s Statement of Practice D12 provides that changes in sharing ratios are not treated as disposals if no consideration passes and certain other conditions are met.

Sources

Capital Gains Manual: partnerships — HMRC
Statement of Practice D12 — HMRC
Business Asset Disposal Relief — GOV.UK
Capital Gains Manual: BADR for partnerships — HMRC