Partnership profit share

Partnership profit share

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50/50 partnership. Can profits be split at year end to suit current tax / tax credits situation OR would it depend on the level of drawings of each partner for the year in question? Also would a partnership agreement have to stipulate profit shares may vary bu business esentially remains 50/50?

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By petersaxton
25th Aug 2010 18:43

Don't understand

Why stipulate profit share if you don't want to be bound by it?

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By pawncob
25th Aug 2010 20:20

Doing the split?

Profits are split at the discretion of the partners, who can vary the agreement at will.

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By Krustytheclown
25th Aug 2010 23:01

Profit split

I want to vary the profit, but don't want one partner to have less of a share of the business if their is a disagreement or the business has to be sold. So essentially for these purposes i want 50/50 but i also want the option to distribute profits to partners for best possible tax savings.

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By petersaxton
26th Aug 2010 07:35

How about this?

"Profits will be split evenly unless the partners agree otherwise".

AS long as the partners agree you can split profits differently but until that time they are entitled to their equal share.

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By Krustytheclown
26th Aug 2010 09:18

Drawings

Thank you Peter.

Would the level of drawings to each partner over the course of the year matter?

eg. profit 30,000 split 80:20, partner A 24,000, partner B 6,000.

Even though throughout the year both partners have taken 15,000 each as drawings.

Can i put partner B through at 6,000 to gain better tax credits?

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By petersaxton
26th Aug 2010 09:54

Tax and tax credits?

Drawings don't matter.

I don't know what the rules are regarding tax credits. Are these profits genuinely independent? Why would you want to have a lower income so that you could claim more tax credits or pay less tax?

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By Krustytheclown
26th Aug 2010 10:03

Partnership

The partnership in question is a couple now separated but still in business together. Any tax due for both partners is going to come out of business funds therefore provided either partner doesn't go into higher tax bracket, the same cumulative amount of tax will apply to them as a business.

The children live with their mum and she is in receipt of the Child Tax Credits for them. To change profit split would get the wife much higher tax credits. On paper this seems fine, but is there something i'm overlooking here?

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By petersaxton
26th Aug 2010 10:17

Less income in total?

The wife may get much higher tax credits but wouldn't she receive less income in total?

If the tax is paid out of the business bank account it is treated as drawings. 

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By Krustytheclown
26th Aug 2010 10:34

Partnership agreement

Thanks for your contributions Peter.

So, i guess as long as the correct terms are in the Partnership agreement partners could change the profit split as they see fit. There shouldn't be any comebacks from HMRC on the split if it's in the agreement.

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By petersaxton
26th Aug 2010 11:23

Strange

 Taxwise there isn't a problem but I'm not sure about the tax credit situation.

It seems strange that somebody would want a lower income unless something was happening behind the scenes.

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By valentino rossi
26th Aug 2010 11:28

Overdrawn current account

Depending on the brought forward figures don't you have a risk of the wife's account becoming overdrawn ased on the figures you are proposing.

My concern here would be if there was a change in the business fortune or the amicable relationship of the couple.

The husband may then ask for her to refund the money that she owes the business. What ever you do I would strongly suggest that the partnership agreement covers all future eventualities.

If here account is consitently overdrawn there is probably a gift between the husband and his ex wife which would be a PET if no longer covered by the spouse exemption.

Also make sure the husband is fully aware of the tax consequences of the treatment, ie he will be paying tax on her share. Albeit out of his drawings so that he can't comeback and blame you in the future.

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By Luke
26th Aug 2010 14:52

Tax credit income

Peter - you ask why would anyone want lower income overall? 

I believe that maintenance paid from an ex-partner does not count as income for tax credit purposes, so presumably he would then just increase her maintenance.  So she wouldn't end up with lower income overall.

Does get my goat that it doesn't count, I used to know a lady with 2 kids who earned approx £12k working part time, her ex paid her £1,600 per month.  Of course her income for tax credits was £13k so she received a lot of money in tax credits that she didn't really 'need'.  Yet of course another woman without a rich ex would receive exactly the same amount in tax credits - no wonder the system needs shaking up.

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By petersaxton
26th Aug 2010 15:14

Luke

Crafty!

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