BIM72295 - Partnerships: Computation & assessment: Other Income: Partner’s Basis Period: Untaxed Income

You apply a common accounts basis of assessment to all the shares of untaxed income allocated to a particular partner (ICTA88/S111 (8)(a) and ICTA88/S111 (8)(c)). You compute and allocate untaxed income in the same way as Case I and II Schedule D income. And so long as the income accrues to a partnership you assess any share of untaxed income on the partner using the partner's Case I/II basis periods.

You achieve this common accounts basis of assessment by treating any shares of untaxed income as if, for assessment purposes only, they are the profits accruing to a ‘second deemed trade’ carried on in parallel to the partner’s first ‘deemed trade’. This approach ensures that

• all shares of untaxed income are assessed using the same basis periods (the periods appropriate to the second notional trade),
• no commencement or cessation rules are required for the individual sources of untaxed income, and
• overlap relief is effectively pooled.

You apply this rule even where the Case I/II income is a minor component of the partnership business. You only apply the common accounts basis of assessment while the associated Case I or II business is carried on by a partnership.

The ‘second deemed trade’ is deemed

• to commence whenever a partnership is first formed, and
• to cease when a partnership is dissolved (unless a continuation basis applies by virtue of ICTA88/S113 (2)).

This is the case for all partners including any member of the partnership who carried on the business as a sole trader before the partnership was formed, or any member who carries on the business as a sole trader after the partnership is dissolved (ICTA88/S111 (8)(b), ICTA88/S111 (8)(d) and ICTA88/S111 (13)(b)).

These rules are required because the common basis of assessment only applies while the associated Case I or II business is carried on as a partnership. The 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.

This is in contrast to the continuation basis that applies to a partner’s Case I/II basis periods in such circumstances (ICTA88/S111 (4)(b) and ICTA88/S111 (4)(e)) - see BIM72260.

Except in the particular circumstances described in the paragraph above the basis periods of the ‘second deemed trade’ are always identical to those of the first. Therefore, in most cases partners are simply able to assess their untaxed income using their Case I/II basis periods. Similarly overlap profit is created and relieved, as for the associated Case I/II income.