The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
This note explains the rules for allocating income, other than capital gains, between partners. For the allocation of capital gains, see the Basic rules for partnership gains guidance note. For the position when there is a change of partners, see the Admitting a new partner and Retirement of a partner guidance notes.
Once partnership profits are calculated (see the Trading profits of a partnership guidance note), partners are free to agree amongst themselves how the profits of the partnership are to be allocated between them.
There is no requirement that the profit share reflects the contribution made by the partners. This may allow for planning opportunities.
The profit-sharing ratio should be set out in the partnership agreement or other documentation, such as minutes of partnership meetings.
Once the partnership profits have been established and allocated to the partners in their profit-sharing ratio, each partner is treated as if he was running his own business in relation to the partnership trade and taxed accordingly; see the Taxation of partnership trading profits guidance note.
A partnership’s untaxed income received without deduction of UK tax (normally property income, foreign income and some interest receipts) is dealt with as follows:
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