PARTNERSHIPS

June 2025 – March 2026

BY SABI AKTHER 1
 What to focus on?
• Partnerships
• Introduction
• Allocations of Trading Profits and Losses
• Allocations of Trading Profits & Losses Between Partners
• Changes to Profit Sharing Ratio
• Capital Allowances
• Admission and Retirement of Partners
• Admission of New Partners
• Retirement of Partners
• Cessation of the Firm as a Whole
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 What to focus on?
• Loss Relief
• Trading Loss Relief for a Partner
• Limited Liability Partnerships
• Limited Liability Partnerships (LLPs)
• Conclusion
• Syllabus Coverage
• Summary
• Technical Articles

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 Objective: To explain the allocation of partnership trading profits or losses.

Partnerships
• Introduction

Allocating Profits & Admission & Retirement of Loss Relief Limited Liability
Losses Partners • Trading Loss Partnerships
• Allocating Profits & • Admission of New Relief (LLPs)
Losses Partners • Limited Liability
• Changes to Profit • Retirement of Partners Partnerships
Sharing Ratio • Cessation of the (LLPs)
• Capital Allowances Partnership

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 Partnerships
1.1 Introduction

A partnership is a group of people carrying on business together with a view to profit. The
partnership (“firm”) is treated as a single trading entity.

Although a person may be a partner in a firm, they are still a separate taxable person for
income tax (and CGT).

The person's share of partnership profits is assessed to tax as part of their total taxable
income for a tax year, in the same way as a sole trader.

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 their individual annual tax return. 5
 Allocations of Trading Profits & Losses

2.1 Allocations of Trading Profits and Losses Between Partners

Partnership profits and losses, determined for the period of account of the firm as a whole,
are first adjusted for tax purposes in the same way as a sole trader. The adjusted profits
and losses are then allocated between the partners according to 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 profit- sharing ratio that is used to allocate surplus profits.

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 Allocations of Trading Profits & Losses

2.1 Allocations of Trading Profits and Losses Between Partners

Salaries and interest on contributions to capital are not deductible expenses of the
partnership, as they are merely an allocation of profit to the partners. It is therefore the
balance of profits, after allocated salaries and interest on contributions to capital, that is
distributed between the partners in their profit-sharing ratio

After the profits or losses have been allocated to the individual partners, these will
determine their taxable trading profit or allowable loss for the tax year.

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 Allocations of Trading Profits & Losses
2.1 Allocations of Trading Profits and Losses Between Partners

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 Allocations of Trading Profits & Losses

2.2 Changes to Profit Sharing Ratio

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 their individual
assessments under the basis period rules for each tax year.

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 Allocations of Trading Profits & Losses

2.3 Capital Allowances

This section assumes the partnership uses the accruals basis (and not the cash basis)
to calculate trading profit for tax purposes.

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. cars). Regardless of
whether the asset is owned by the partnership, or one of the partners, capital
allowances are calculated on both types of assets for the period of account of the firm,
as normal, and are deducted as a trading expense before allocating profits between the
partners.
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Allocations of Trading Profits & Losses
2.3 Capital Allowances

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Allocations of Trading Profits & Losses
2.3 Capital Allowances

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 Admission & Retirement of Partners

3.1 Admission of New Partners

If a new partner is admitted to the partnership, or a partner retires from the partnership,
there will inevitably be a change in the profit-sharing arrangements. The tax adjusted
profits are calculated as normal, and then the partners are treated individually as sole
traders.

When a partner is admitted to an existing firm (or a sole trader takes in their first
partner), the incoming partner is assessed as if they were a newly self-employed sole
trader based on their share of the firm's profits. The assessment basis of each of the
existing partners is unaffected.
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 Admission & Retirement of Partners

3.2 Retirement of Partners

When a partner leaves an existing firm, the last year basis applies to their share of
profits only. The leaving partner will also be taxed on any untaxed transition profits.
Again, the assessment basis for the remaining partners is unaffected.

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Admission & Retirement of Partners
3.2 Retirement of Partners

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 Admission & Retirement of Partners

3.3 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.

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 Loss Relief
4.1 Trading Loss Relief for a Partner

A loss is allocated between partners in the same way as a profit. Where a partner has a
loss for a tax year they can choose to relieve their share of the loss in the way that best
suits their individual circumstances. Partners can claim the same loss reliefs as sole
traders.

For an established business, this usually means choosing between the more immediate
loss relief against total income (with or without relief against gains) and later 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 opening year
relief for attributable shares of a loss of any of the first four tax years of assessment. 31
 Loss Relief

4.1 Trading Loss Relief for a Partner

Where a partner leaves a firm and has been allocated a loss prior to their retirement,
they can claim the appropriate form of loss relief, including terminal loss relief against
their share of trading profits for the final and preceding three tax years of their trade.
However, they cannot claim to carry forward the loss, as any carry forward is only
allowed against future profits of the same trade, and they will no longer be part of the
firm.

If the firm as a whole ceases trading, all partners can make a terminal loss relief claim.

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 Loss Relief
4.1 Trading Loss Relief for a Partner

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 Limited Liability Partnerships

5.1 Limited Liability Partnerships (LLPs)

Limited liability partnerships (LLPs) are separate legal entities in which the partner's
liability for the firm's debts is limited to their fixed capitals.

Each partner is taxed on their individual share of the LLP's profits applying the rules
already discussed.

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 Conclusion
Syllabus Coverage

B. Income Tax and NIC Liabilities

3. Income from self-employment

g) Partnerships and limited liability partnerships

i. Explain and compute how a partnership is assessed to tax.

ii. Explain and compute the assessable profits for each partner following a change
in the profit-sharing ratio.

iii. Explain and compute the assessable profits for each partner following a change
in the membership of the partnership.

iv. Describe the alternative loss relief claims that are available to partners. 37
 Conclusion
Summary

• A partner in a partnership is assessed on their profit share (including salary and

interest on capital contributions), in the same way as a sole trader.

• The balance of profits, after allocated salaries and interest on capital, is distributed
between the partners in their profit sharing ratio.

• The profit shared is an adjusted trading profit (i.e. after capital allowances on the
partnership's assets) and is time-apportioned for any changes in arrangement
during a period of account.

• An incoming partner is treated as a newly self-employed sole trader based on

their share of the firm's profits.

• The last year basis applies to an outgoing partner.

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• Assessments for existing/remaining partners are unaffected.
 Conclusion
Summary

• Untaxed transition profits must be taxed when a partner retires from the partnership,
or if the partnership ceases.

• Partners can claim the same loss reliefs as sole traders. Therefore a partner with a
trading loss in an established business can choose between immediate reliefs
against total income (with or without relief against gains) and carry forward relief
against future trading profit.

• A partner leaving a firm with an allocated loss can choose any type of relief, including
terminal loss relief. All partners can make these claims if the partnership ceases.

• LLPs limit the partners' liability to their fixed capital. 39

 Conclusion

Technical Articles

In addition to the Finance Act 2024 Article, there are several technical articles for
Taxation (UK). However, there are no technical articles that relate specifically to this
chapter.

For more recent articles and other resources please visit the ACCA global website.

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