Payment to an outgoing partner....

Payment to an outgoing partner....

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Good afternoon all,

I have a partnership client.

One of the partners ceased during 2010/11.

The ongoing partners anticipate the outgoing partner might query certain entries included within the business accounts.

To placate the outgoing partner in the hope that arguments can be avoided, the continuing partners are proposing they make a payment beyond that to which the outgoing partner is contractually entitled; that is, the outgoing partner will take the full value of their current account, capital account plus another £xxk almost ex gratia if you like.

Does anyone have any thoughts on the tax implications for either party?

Best regards

Replies (7)

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Stepurhan
By stepurhan
25th May 2011 07:57

Sounds like a profit allocation

Since they are a partner rather than an employee, the extra payment sounds like an additional one-off profit allocation to me. It would therefore be taxable as profit share from the partnership on the receiving partner. For the remaining partners will have reduced profit shares as a result for the period in which the allocation is made.

There is no scope for this being treated as an ex gratia redundancy payment. You can't be made redundant as a partner.

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By AnthonyDavidMain
25th May 2011 09:00

Thanks for your comment...

Thanks for your comment!

I appreciate partners can't be made redundant.

My mind was ticking over yesterday pondering whether the recipient partner is actually receiving an additional allocation of profits (my first thought, same as yours) or whether they are in receipt of a capital payment of some sort, given that it is completely outwith the partnership agreement.

If the latter, that would then beg the question is the expense allowable as a deduction against the business profits of the ongoing partners.

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By MarionMorrison
25th May 2011 09:30

Surely CG

 The departing partner has had their share of remuneration to which they're agreement-entitled.  They are relinquishing a one-third (or whatever) share in the business and being paid money for that share?  Then it's some form of goodwill disposal and CGT and Entrepreneur Relief should apply.

Well that's where I'd go..

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By ACDWebb
25th May 2011 10:25

Probably profit share

Look HERE

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Stepurhan
By stepurhan
25th May 2011 11:30

No share disposal

If they no longer have a current or capital account within the partnership, they have no interest in the partnership. Therefore any additional payment cannot be a capital disposal. If the assets in the partnership have increased in value then there is potential for a capital receipt (their share of the increased value of assets). You'd need formal valuations as evidence before even considering that as I suspect HMRC would pursue this vigorously if reclassifying it as capital reduced the overall tax take.

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By Ernest N Dever
25th May 2011 13:50

I think ACDWebb's case pretty much nails it...

... but as has been suggested it's either taxable as income or it's proceeds from disposal of assets or rights.

There are no contractual arrangements between partners per se.  There are arrangements agreed between them.

For the partnership there can be no deduction because either it is a capital payment (expressly not permitted), or it's a payment out of profits (rather than an expense incurred wholly and exclusively for the purposes of the trade).  I expect the latter.

The only situation in which the partnership might get relief is if the payment is in exchange for a restrictive undertaking, but then there may also be a capital argument.

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By AnthonyDavidMain
25th May 2011 14:32

Thanks guys...

Thanks guys, all good stuff!

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