For 7 years a new client (Mrs A) has been trading through a partnership of which the partners are:-
1. Herself
2. A company of which she is sole director and shareholder
The partnership profit share is 50:50.
Mrs A has been drawing all the profits directly and the company accounts show a debtor of it's unpaid profit share from the partnership. Over the years, this has amounted to about £500K.
In my view, this presents a problem insomuch as there are effectively untaxed drawings from the company and that HMRC will want to tax this as such as salary/dividends, etc. Alternatively, they might want to tax it as a loan to the director under S419, with the resultant beneficial loan charges and penalties for non-disclosure on forms P11D.
Could contributors please comment on whether they agree with me, and also other problem areas to consider?
It has been suggested that Mrs A winds the company up under ESCC16 and writes off the director's loan by way of a capital distribution, taxed under CGT rules at 10%, but I am not sure that HMRC would agree to ESCC16 in these circumstances, and in any case would it be a feasible solution to the problem?
All help greatly appreciated.
Thanks.
Replies (1)
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Done that
If her capital a/c isn't overdrawn in the partnership, there will be no s 455 charge (confirmed in HMRC manuals). As there is no loan to an employee, there is no P11D benefit.
We recently closed down a similar structure for a client - the company had an undrawn profit share of c. £250k accumulated over several years. We applied for, and got, agreement to use ESC C16, and a recent enquiry on the shareholders' tax returns has confirmed that HMRC accepted that entrepreneur's relief was due on the gain.