Trading profits of a partnership

Introduction

This note explains the general rules for the calculation of partnership profits before allocation to the partners. Once the partnership profits are calculated, 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. See Allocation of partnership income ― Planning opportunities.

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

For a discussion of how trading profits, untaxed income, taxed income and capital gains are assessed on partners, see the Taxation of partnership trading profits, Taxation of untaxed income of a partnership, Taxation of taxed income of a partnership and Basic rules for partnership gains guidance notes.

Basic computational principles

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

1. •

   under UK tax law, all partnerships are transparent for tax purposes. This is the case even for limited liability partnerships (LLPs) or Scottish partnerships where the partnership itself is a legal person (see the Partnerships ― overview guidance note)

2. •

   even though all partnerships are transparent for tax purposes, the first step when calculating the taxable profits of each partner is to assume that the partnership is a single U