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:

  • Untaxed income of a partnership
  • Introduction
  • What is not included in untaxed income?
  • Sources of untaxed income

Introduction

This note explains what is untaxed income for a partnership. How this income is allocated and taxed on the partners are discussed in the Allocation of partnership income and Taxation of untaxed income of a partnership guidance notes.

The types of untaxed income most commonly received by UK partnerships are UK interest and property income.

Before considering the rules under which these amounts are taxed, it is first important to eliminate certain payments which may be wrongly classified as ‘untaxed income’.

What is not included in untaxed income?
Interest on partnership capital

Interest paid on partnership capital is not treated like other interest, either when paid by the partnership or when received by the individual partners (ie it is not an allowable deduction from trading profits). Instead, it is treated as a distribution of profits.

Heastie v Veitch 18 TC 305 at 319 (subscription sensitive)

As an illustration, if a member introduced a capital of £100,000 to a partnership and received an interest on capital at 5% per annum, £5,000 (£100,000 x 5%) would be disallowed when calculating the adjusted trading profits of the partnership for the relevant year end, and instead would form pa

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