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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Partnerships - computation and assessment: effect of changes in membership on partner’s basis periods

Example

The following example shows how changes in the membership of a partnership affect the individual partners basis periods for the purposes of their ‘notional trade’ (trade profits) and their ‘notional business’ (other untaxed income).

| Peter Bailey commences trading on 1/7/1998 and produces accounts to 30/6/1999 and then to 30/6 each year until 30/6/2010 | * During the period 1/7/1998 to 30/6/2010 Peter Bailey is a sole-trader * Trading income arising in his business is chargeable according to the normal basis period rules * All other income arising in the business is chargeable on a tax year (6 April to 5 April) basis, including any such income arising in the period 6/4/2010 to 30/6/2010 | || | On 1/7/2010 Peter Bailey’s two sons, Harry and George, join the business as partners | * The formation of the partnership has no effect on Peter Bailey’s notional trade basis periods * The notional business of all three partners commences on 1/7/2010 * The notional trades of Harry and George Bailey commence on 1/7/2010 * The basis periods for the notional businesses of all three partners are found using trading income basis period rules as if a trade commenced on 1/7/2010. Therefore the basis period for shares of untaxed income in 2010/11 is the 9 months to 5/4/2011 and for 2011/12 is the 12 months to 30/6/2011. The 9 months to 5/4/2011 is a period of overlap * The basis periods for the notional trades of Harry and George Bailey are found using the same rules as for their notional trade | | On 30/6/2015 Peter Bailey retires, leaving his two sons to carry on the business | * Peter Bailey’s retirement triggers a cessation (including the rules for overlap relief) in both his notional trade and notional business * But the change in the membership of the partnership has no effect on the basis periods used by either Harry or George Bailey | | On 30/6/2017 the partnership between Harry and George is dissolved. George continues to carry on the business on his own | * Harry Bailey’s departure triggers a cessation (including the rules for overlap relief) in both his notional trade and his notional business * The dissolution of the partnership has no effect on the notional trade basis periods used by George Bailey * But George Bailey’s notional business is deemed to cease on 30/6/2017. From this date any other untaxed income arising in the business is assessed on a tax year (6 April to 5 April) basis |