The measure

As part of the Government's previously announced review of the taxation of partnerships, draft legislation was published today on two key changes that will affect some mixed partnerships (ie those with individual partners and non-individual partners, such as corporates).

The first change affects mixed partnerships where profits are allocated to a non-individual partner in circumstances where an individual partner may benefit from those profits.

The measures seek to reallocate ‘excess’ profit allocations from the non-individual partners to individual partners where certain conditions are met. Broadly, these conditions are where:

  • the non-individual partner's profit share is considered excessive;
  • the individual partner has the power to enjoy the non-individual partner's profit share or there are deferred profit arrangements in place; and
  • it is reasonable to suppose that the whole or part of the non-individual partner's profit share is attributable to the individual partner's power to enjoy those profits or the deferral arrangement.

The second change to be introduced will deny certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner where one of the main purposes of allocating the loss to the individual partner, rather than the non-individual partner, is for the individual partner to obtain relief.

The draft legislation in respect of disguised employment relationships in LLPs is expected to be released next week.

Who will be affected?

Partners of mixed partnerships who operate corporate partner deferral plans, for example, may be within the scope of the measures on excess profit allocations and therefore should consider further the implications for any such deferral plans.

The proposals apply to LLPs and other partnerships. Today's announcement confirms the extension of the proposals to alternative investment funds, typically hedge fund firms.


These rules will take effect from 6 April 2014 with the exception of the anti-avoidance rules concerning tax-motivated profit allocations, which come into force on 5 December 2013.

Our view

Following the consultation on partnerships published on 20 May 2013, these announcements reaffirm the Government's commitment to tackle perceived avoidance in respect of partnerships, with the proposals expected to bring in additional revenues of £1.9 billion in addition to the original forecasts for the period 2015-16 to 2018-19.

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