Taxation of untaxed income of a partnership

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Taxation of untaxed income of a partnership
  • Introduction
  • How is untaxed partnership income taxed?
  • Overlap profits
  • Bank and building society interest arising from 2016/17 onwards

Introduction

This note explains how untaxed income received by a partner from his partnership is taxed. The Untaxed income of a partnership guidance note details what income is included as ‘untaxed income’.

For the taxation of taxed income, see the Taxation of taxed income of a partnership guidance note. For the taxation of trading profits, see the Taxation of partnership trading profits guidance note. For foreign income, see the Partnership foreign income and tax paid guidance note (subscription sensitive).

How is untaxed partnership income taxed?

A partnership’s untaxed income is dealt with as follows:

  • the income receivable for the partnership period of account is identified and any allowable expenses are deducted (eg repairs will be deductible against rental income)
  • the net amount is then divided between the partners in the profit-sharing ratio which applies to trading income for that period of account
  • the amount allocated to each partner is then treated as arising from a second ‘notional trade’ *
  • this second notional trade or profession is deemed to commence whenever a person joins the partnership, or if later, when the partnership begins to trade
  • the notional trade is deemed to cease when the individual leaves the partnership, or if earlier, when the partnership ceases to trade **
  • this treatment also applies if there are losses rather than profits

ITTOIA 2005, ss 854–855

* It is important to realise that this treatment effectively pools all untaxed income, so there are no separate ‘notional trades’ for each source of untaxed income.

** This means that the notional trade continues even through years when there is no untaxed income.

If the untaxed income includes income of

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