Commentary

B7.517 Calculation of private equity partner's tax liability

Business tax
Business tax | Commentary

B7.517 Calculation of private equity partner's tax liability

Business tax | Commentary

B7.517 Calculation of private equity partner's tax liability

Private equity partnerships are typically limited partnerships with one general partner and the rest being limited partners (see 'Limited partnerships as investment partnership' at B7.106).

The income of a private equity partnership is allocated according to each partner's interest and taxed separately in the hands of each partner according to the partner's status in the usual manner. The following points detail issues that might be relevant to private equity partnership assessments only.

The general partner will normally make only a small contribution, if any, to the funds as general partner but will be remunerated by way of a prior share of the fund's profits (a 'priority' or 'management' profit share)—typically first out of the fund's (net) income and, if that is insufficient in any year, its capital realisations. Since profits may not be generated within the fund in its early years, the general partner will normally be allowed under the partnership agreement to make drawings in anticipation and in advance of the fund-making profits from which its profit-share can be met.

HMRC accepts that such drawings themselves are not taxable unless and until they are identified with the partner's share of the flows of the fund's profits or gains1. They merely represent a 'loan' or advance. However, if, when the fund is finally liquidated, the general partner's drawings exceed the fund's aggregate profits and gains, HMRC may then contend that the excess is

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