beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: Businesses transferred to the partnership

This section looks at the tax treatment of the transfer of a business to a partnership by a company, where:

  • the company and a shareholder of the company both become (or are) partners in the firm,
  • the consideration given for the transfer is in the form of an equity stake in the partnership.


The question is whether the excess profit allocation rules apply because of the shareholders power to enjoy?


Appropriate notional return on capital:

The position is that the transferor company has transferred the business to the LLP and in return has been credited with having contributed capital to the firm.

For the purposes of the excess profit allocation rules the amount of capital contributed is the open market value of the assets transferred at the time of transfer, not the historic or book value.

The fact that the transferor company has contributed assets rather than cash as capital makes no difference.

If the transferor company can draw on the sum then it is not capital contributed for the purposes of the excess profit allocation rules, see BIM82750.

The appropriate notional profit for the transferor company includes an appropriate notional return on capital based on the open market value of the assets transferred as capital at the time of transfer.

The appropriate notional return on capital is calculated as a commercial rate of interest. 

There is no higher “equity return” based on the fact that the transferor company transferred a business. The value of that business transferred has already been recognised in the value of the capital account.


Appropriate notional return for services;

If the transferor company retains assets which it makes available to the LLP then the appropriate notional profit includes an appropriate notional consideration for services (less any amount actually paid by the partnership for the use of the asset), see BIM82760.


Profit share exceeds appropriate notional profit:

The legislation recognises the value of the business transferred.

If the profit share allocated to the transferor company exceeds the “appropriate notional profit” then the question is whether the transferor company has received that excess by reason of the ability of an individual member to enjoy the profit.

Put another way, the question is whether there is any reason why the company should receive an additional profit share having regard to the work being done for the firm by the partner who is earning the profit? That is, is this a device whereby the individual aims to alienate what would otherwise be personal income in a way that reduces tax overall?

Where a shareholder continues to be involved in the business after the transfer, it will nearly always be reasonable to conclude that the excess allocation of profits to a company which they substantially own (whether or not with connected individuals) is attributable to their continuing involvement with the firm, with the result that any such profit allocated to the corporate member will be reallocated to the individual.

Cases where this is not the case will be exceptional. The most likely scenario is where the company is widely owned and there are a majority of shareholders unconnected with the partner, and who are not involved with the business but who get the benefit of the profits allocated to the company. In those circumstances it is very unlikely that the individual members are using the company member to alienate their income since the effect of allocating excess profits to the company would also be to give them away to third parties.

Examples of how the excess profit allocation rules apply to transfers of businesses can be found at BIM82860.