The measures apply where the partners or members include both individuals and non-individuals (mixed membership partnerships).
Most commonly the non-individuals will be company members of the partnership. There will be two areas potentially affected:
- where partnership profits are allocated to a non-individual partner in circumstances where an individual member may benefit from those profits
- where partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs.
The main changes relate to profit allocation and these rules come into force on 5 December 2013.
Excess profits will be reallocated to an individual partner from a non-individual partner where the following conditions are met:
- a non-individual partner has a share of the firm’s profit
- the non-individual’s share is excessive
- an individual partner has the power to enjoy the non-individual’s share or there are deferred profit arrangements in place
- it is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power or arrangements.
The Government is proposing to introduce legislation which will result in certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner being denied.
The reliefs will not be available where the individual is party to arrangements, the main purpose of which, or one of the main purposes of which, is to secure that some or all of the loss is allocated, or otherwise arises, to the individual, instead of a non-individual, with a view to the individual obtaining relief.
These changes will take effect from 6 April 2014.
Some changes to the treatment of mixed member partnerships have been expected following the issue of a consultative document. The difficulty with the proposed legislation may be determining the boundary between profit allocations which are caught or not caught by the legislation.