At a glance
Partnerships, their partners and different sources of income
Partnerships come in a number of forms which include general partnerships, limited partnerships and Limited Liability Partnerships (LLPs).
A partnership is normally treated as transparent for tax purposes.
- Its activities are deemed, for tax purposes, to be undertaken by its partners.
- Certain partnerships can have a mixture of individuals and corporates as partners. There are differences between the tax principles governing income and corporate taxes and these need to be reflected when calculating the applicable profit shares.
- Some sources of income need to be declared on Partnership Returns in line with the tax year, while others are in line with the partnership accounting period ending in the tax year.
- When preparing the returns for the partners, the income on the Partnership Return is not necessarily the income that needs to be included on the partners' return. See: Accounting periods and tax basis periods
Note that an LLP that does not carry on a business with a view to profit is treated as opaque rather than transparent.
Partnership Tax Returns
Preparing Partnership Tax Returns
Where a partnership includes individual partners, the Partnership Return should be calculated according to Income Tax principles and include income and disposal proceeds as follows:
- Trading and professional income for the partnership accounting period ending in the tax year of the Return.
- Untaxed savings, investment and other income arising in the accounting period ending in the tax year of the Return.
- Taxed savings, investment and other income arising in the tax year of the Return, rather than the partnership accounting year.
- Foreign income which has suffered UK tax for the tax year of the Return.
- Foreign income which has not suffered UK tax for the accounting period ending in the tax year of the Return.
- UK property income arising in the accounting period ending in the tax year of the Return.
- Disposal proceeds for chargeable disposals in the tax year of the Return.
- For an investment partnership, where no trade or profession is carried on, return all income arising in the tax year irrespective of the accounting year-end.
Where a partnership is made up only of corporate partners:
- Return all sources of income and disposal proceeds arising in the accounting period of the partnership ending in the tax year.
If a partnership has losses see: Partnerships: Losses
Extra considerations for partnerships with individual and corporate members
Some expenses which would not be allowed for Income Tax purposes may be allowed for Corporation Tax purposes and vice versa.
This can include:
While the main body of the partnership return will be prepared on an Income Tax basis as above, any expenses which would be allowable for a corporate member need to be allocated to the corporate partners in line with their applicable profit sharing ratio. The share of any such expense which would be allocated to individual partners is lost. Details should be included in the Additional Information on the Partnership Return.
Example 1:
Andrew and B Ltd are members of C LLP. C LLP has an investment business.
Both Andrew and B Ltd have a 50% share of LLP profits which are £100,000 for the year under Income Tax principles.
C LLP also has what would be management expenses under Corporation Tax principles totalling £10,000. As B Ltd has a 50% profit share, it can include a deduction of 50% of the management expenses. Andrew's 50% share of the management expenses are not available as a deduction for him and are lost.
The taxable profit share for Andrew is £50,000 and the taxable profit share for B Ltd is £45,000.
Example 2:
Wendy and Y Ltd are members of Z LLP each having a 50% profit share. Z LLP runs a residential property investment business.
For the year to 5 April 2021, rental income less expenses other than finance costs total £100,000. Finance costs total £20,000.
Under Income Tax principles Wendy has a profit share of £50,000 and is entitled to a basic rate deduction of her share of the £10,000 of finance costs as Relief for mortgage interest is restricted.
Y Ltd's profit share is £40,000. This is after deducting its 50% share of the finance costs which represent a non-trading loan relationship deficit.
Tax Returns for the partners
The tax returns of the partners
Individual Partners
As the default basis for preparing the partnership return is based on income tax principles, an individual is subject to tax on the profit which has been included in the Partnership Return. No further adjustment is required unless the opening or closing year rules apply. See: Accounting periods and tax basis periods
Corporate Partners
A corporate partner needs to calculate any Corporation Tax liability in line with its own accounting period.
If the accounting year of the corporate is not coterminous with the accounting period of the partnership of which it is a partner, the corporate needs to apportion the profits of the two applicable partnership accounting periods accordingly.
For example, if the company has an accounting year ending 31 December 2020 and the partnership has an accounting date of 31 March, the corporate tax return needs to reflect 3/12 of the partnership profits to 31 March 2020 and 9/12 of the partnership profits for the year to 31 March 2021.
Partnership profit disputes
Partners are assessed on the profits they have been allocated in the partnership tax return. In the event of disputes, the Tribunal can be asked to adjudicate.
See: Disputed profit share: What do I put in my return?
