Partnership profit allocation

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Partnership profit allocation
  • Introduction
  • The starting point
  • Calculating the profits of the partnership
  • The notional trade
  • Allocation of profit on the partnership Tax Return ― finality for tax purposes

Introduction

This guidance note explains the general rules for the taxation of trading profits allocated to partners. For the position when there is a change of partners, see the Admitting a new partner and Retirement of a partner guidance notes (subscription sensitive).

For the rules when the partners remain the same, but there is a change in the allocation of profits between them, see the Allocation of partnership income guidance note (subscription sensitive). Special rules apply where changes in ratio affect capital assets, see the Calculation of partnership gains and losses guidance note.

Partners are free to agree amongst themselves how the profits of the partnership are to be allocated between them (subject to any anti-avoidance rules which may apply, see the Partnership anti-avoidance provisions guidance note (subscription sensitive)). There is no requirement that the profit share reflects the contribution made by the partners. This may allow for planning opportunities, see the Allocation of partnership income guidance note (subscription sensitive).

The profit-sharing ratio should be set out in the partnership agreement or other documentation, such as minutes of partnership meetings.

The starting point

The calculation of partnership profits rests on four rules. These apply to all partnerships, irrespective of their type. Some of the rules may appear strange or even contradictory.

The rules are:

  • under UK tax law, all partnerships are transparent for tax purposes. This is the case even for LLPs or Scottish partnerships where the partnership itself is a legal person. See the Types of partnership and types of partner guidance note (Generally: ITTOIA 2005, s 848; LLPs: ITTOIA 2005, s 863(1)(a))
  • even though all partnerships are transparent for tax purposes, the first step when calculating the taxable profits of each partner is

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