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Mixed Partnerships – Anti-Avoidance

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The Mixed Membership Partnership legislation applies to partnerships or UK LLPs whose membership includes both individuals and members who are not individuals.

The Mixed Member Partnership legislation applies to prevent profits and losses being allocated in a way that reduces the tax liabilities of individual partners.

The excess profit allocation rules apply where an individual, or individuals, divert all or part of their profit share to a non-individual member or members, usually a company or companies, in order to reduce tax on their profit share.

The excess profit allocation rules over-ride the profit-sharing arrangements agreed by the members so that individual members are taxed on the diverted profits.

The excess profit allocation rules do not apply to mixed membership partnerships in which the individual and non-individual partners are genuinely unconnected, and which do not concern profit deferral arrangements.

The Impact of mixed partnerships rules:

As a result of these rules, individual partners will have to pay Income Tax on those profits reallocated from a corporate member.

Equally, corporate members will recognise a corresponding reduction in their taxable profits, and any dividends paid to individuals (with the ‘power to enjoy’) are ignored for tax purposes.

The overall result is that the rate of tax on a corporate member’s profits that are reallocated to an individual member will more than double from as little as 20% to as high as 47%.

The rules do not just apply to profit making partnerships.

HMRC will also actively seek to reallocate losses which have been diverted for tax avoidance to the individual partner rather than the corporate partner to prevent the individual reducing their Income Tax arising on other sources of income.

For more information on our Partnerships Tax services visit the below page below or contact Todd Wootton for more information.

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