Income Tax (Trading and Other Income) Act 2005 section 861

Sale of patent rights: effect of partnership changes

Section 861 deals with how the tax charge on proceeds from a sale of patent rights is reallocated when there is a change in the membership of a partnership carrying on the trade during the period over which the tax charge is spread.

• When a trader sells patent rights and the resulting tax charge is spread over multiple tax years, a change in partnership membership during that spreading period triggers special rules for reallocating the charge
• The section applies only where the trade is carried on in partnership (either at the time of sale or during the spreading period) and at least one person continues in the trade after the change — if there is a complete change of persons, section 862 applies instead
• After the partnership change, the remaining tax charges are treated as arising to the new or continuing partners, allocated according to their profit-sharing arrangements and spread at a constant daily rate over the remainder of the relevant period
• If the change occurs part-way through a tax charge period, the outgoing partner is taxed on a proportionate share of that period's charge up to the date of change, and the balance is redirected to the continuing or incoming partners