1 Introduction
Although a person may be a partner in a firm, he is still a
separate taxable person for income tax (and CGT). The person's share of
partnership profits is assessed to tax as part of his total taxable income for
a tax year.
For self-assessment purposes, the firm produces a partnership
return showing the allocated amounts of income (and gains) for all partners.
Each partner uses this information to complete his individual annual tax
return.
2 Allocations of Trading Profits and Losses
Between Partners
Adjusted profits and losses, determined for the period of account
of the firm as a whole, are allocated between the partners in the
profit-sharing arrangements of that period of account.
Profit-sharing arrangements include the partners' salaries,
interest on contributions to the firm's capital and the profitsharing ratio
that is used to allocate surplus profits.
If the profit-sharing arrangement changes during a period of
account, the profit or loss is time-apportioned between the periods before and
after the change. The profit or loss before the change is allocated according
to the old arrangement; the profit or loss after the change according to the
new arrangement.
Each partner's share of profit or loss will then be used to
determine his assessments under the current year basis (CYB) for each tax year.
3 Admission and Retirement of Partners
When a partner is admitted to an existing firm (or a sole trader
takes in his first partner), the incoming partner is assessed using the current
year opening year rules on his share of the firm's profits. The assessment of
each of the existing partners is unaffected.
When a partner leaves an existing firm, the last year basis
applies to his share of profits only, with relief for his share of accumulated
overlap profits. Again, the assessment basis for the remaining partners is
unaffected.
4 Cessation of the Firm as a Whole
Where the firm as a whole ceases to be assessed to income tax, the
last year basis applies to all the partners with relief given for each
partner's share of accumulated overlap profits.
5 Trading Loss Relief for a Partner
Where a partner has a loss for a tax year he can choose to relieve
his share of the loss in the way that best suits his individual circumstances.
For an established business, this usually means choosing between
the more immediate s.64 relief against total income (with or without s.261 TCGA
1992 relief against gains) and later s.83 carry forward relief against future
shares of trading profit.
All partners of a new firm and a new partner of an existing firm
may claim s.72 relief for attributable shares of a loss of any of the first
four tax years of assessment.
Where a partner leaves a firm and has been allocated a loss prior
to his retirement, he can claim the appropriate form of loss relief, including
s.89 (terminal loss) relief against his share of trading profits for the final
and preceding three tax years of his trade.
If the firm as a whole ceases trading in such circumstances, then
all partners can make a terminal loss claim.
6 Capital Allowances
Assets attracting capital allowances may be owned by the firm
(e.g. office equipment) or by the partners personally and used for business purposes
(e.g. motor cars).
Where these different arrangements exist:
= capital allowances are calculated on both types of assets for
the period of account of the firm (i.e. as normal);
= capital allowances on the firm's assets are deducted as a
trading expense before allocating profits between the partners (note this
applies to all assets owned by the partnership, even if subject to private
use);
= capital allowances attributable to the business use of privately
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