B7.504 Allocation of partnership income—mixed member partnerships
Anti-avoidance provisions apply to remove any potential tax advantages that could be gained through allocations of profits/losses in a mixed partnership, where those allocations seek to exploit the mismatch in tax rates between individuals and non-individuals1.
A mixed member partnership is a partnership whose members are a mixture of individuals and non-individuals (ie a company, trust, or another partnership).
These rules apply to limited partnerships and LLPs as well as general partnerships. HMRC guidance is at PM210000 onwards.
There are separate rules for profit allocation and loss allocation arrangements, which are discussed below.
Excess profit allocations to partners
The rules address situations where partnership profits are allocated to a non-individual partner in circumstances where an individual member derives a benefit. In such situations, the 'excess' profits are essentially reallocated to ensure that the partners are taxed according to the profits they would have received in the absence of the arrangements.
This targets arrangements where, for example, a mixed partnership allocates more profits to a corporate partner in a profitable year (to take advantage of the lower rate of corporation tax as compared to income tax) and the individual partners, for instance, withdraw the profits as dividends in a later, less profitable year.
Where these provisions apply, the profit share of an individual partner (A) is increased by a specified amount of the profit share of a non-individual partner (B) (and B's profit share is consequently decreased) if either of conditions X or Y is met2.
• Condition X