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HMRC internal manual

Partnership Manual

Partner’s basis period: untaxed income

S854, S855 Income Tax (Trading and Other Income) Act 2005


Untaxed income is computed and allocated to partners in the same way as trading income (see PM163470 and PM163480). So long as the income accrues to the partnership each partner’s share of the untaxed income is charged to Income Tax using the partner’s trading income basis periods.


This is achieved by treating any shares of untaxed income as if they are the profits accruing to a trade, the ‘notional business’, carried on by the partner alone. This approach ensures that:


all of a partner’s shares of untaxed income are charged using the same basis periods (the periods appropriate to the notional business), no commencement or cessation rules are required for the individual sources of untaxed income, and overlap relief is effectively pooled between the sources.


This rule applies even where the trading income is a minor component of the partnership business but only whilst the partnership is carrying on a trade.


A partner’s notional business is treated as having commenced when they first joined the partnership or, if later, when the partnership started to carry on a trade. The notional business is treated as having ceased when they leave the partnership or, if earlier, when the partnership permanently ceases to carry on a trade. The notional business continues even if no income arises in a particular tax year.


These rules do not apply to any period:

  • before a sole trader admits a partner into a business, or
  • after a partnership is dissolved leaving one of the partners to carry on the business on their own.
  • Accordingly, in such circumstances, the notional business of each partner who is a partner at the time of the formation of the partnership commences at that time. The notional business of each partner at the time of dissolution is treated as permanently discontinued at that time. This is in contrast to the continuation basis that applies to a partner’s trading income basis periods in such circumstances - see PM163090.


Except in the particular circumstances described in the paragraph above, the basis periods of the notional business are always identical to those of the notional trade. Therefore, in most cases partners are simply able to self assess their untaxed income using their trading income basis periods. Similarly overlap profit is created and relieved, as for the associated trading income.