Allocation of partnership income

Produced by Tolley

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

  • Allocation of partnership income
  • Introduction
  • Trading income
  • Untaxed income
  • Taxed income
  • Changes in existing partners’ ratios
  • Reallocation of notional profits / losses between partners
  • Mixed partnerships and profit allocations
  • Planning opportunities
  • The settlements legislation

Introduction

This note explains the rules for allocating income, other than capital gains, between partners. For the allocation of capital gains, see the Basic rules for partnership gains guidance note. For the position when there is a change of partners, see the Admitting a new partner and Retirement of a partner guidance notes.

Trading income

Once partnership profits are calculated (see the Trading profits of a partnership guidance note), partners are free to agree amongst themselves how the profits of the partnership are to be allocated between them.

There is no requirement that the profit share reflects the contribution made by the partners. This may allow for planning opportunities.

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

Once the partnership profits have been established and allocated to the partners in their profit-sharing ratio, each partner is treated as if he was running his own business in relation to the partnership trade and taxed accordingly; see the Taxation of partnership trading profits guidance note.

This means that each partner must use:

  1. the opening year rules for basis periods when joining the partnership, see the Basis of assessment ― opening years guidance note

  2. the closing year rules for basis periods when leaving the partnership, see the Basis of assessment ― closing years guidance note

Untaxed income

A partnership’s untaxed income received without deduction of UK tax (normally property income, foreign income and some interest receipts) is dealt with as follows:

  1. the income receivable for the partnership period of account is first identified

  2. it is then divided between the partners in the profit sharing ratio which applies to trading income for that period of account

  3. the amount allocated to each partner on that basis is then treated as arising from a second ‘notional trade’. It is important to realise that this tre

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