The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
This note explains the tax rules that apply when a new partner is admitted to a partnership. For the position when a partner leaves the partnership, see the Retirement of a partner guidance note. A partner joining or leaving a firm can have an effect on the capital allowances or capital gains position, see further the Capital allowances and Capital gains of a partnership guidance notes.
For the rules which apply when the partners stay the same, but there is a change in the profit sharing ratios, see the Allocation of partnership income guidance note.
A partnership exists if two or more persons are doing business in common and sharing profits and losses, see the Is there a partnership? guidance note). No formal document is required. However, it is strongly recommended that the admission of the new partner is recorded by way of an appropriate legal agreement.
If the agreement states that the partner has been admitted to the partnership before the date of the document, this is not legally effective unless, as a question of fact, the partnership previously existed, so that the agreement is merely recording the reality.
This point has been addressed in the courts ― see for example Waddington v O’Callaghan. This and other cases are discussed in further detail in Simon’s Taxes B7.101.
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