Income Tax (Trading and Other Income) Act 2005 section 850E

Payments by B out of the excess part of B's profit share

Section 850E deals with the income tax treatment of payments made by a non-individual partner (B) out of the excess portion of their profit share, where the excess profit allocation rules in sections 850C or 850D have applied to reallocate profits to an individual partner (A).

• Where the excess profit allocation rules have increased A's profit share (or treated A as having a share of the firm's profit), B may make payments to another person out of the excess part of B's profit share under an agreement, provided the main purpose is not to obtain a tax advantage.
• If the conditions are met, any such payment is not treated as income of the person who receives it for income tax purposes.
• The payment is also ignored when calculating B's own profits or losses and cannot be deducted from B's income.
• The payment is not regarded as a distribution for income tax purposes.