I am a management accountant so not an expert on tax or HMRC. I was hoping bounce some ideas of anyone willing to help (while waiting for my actual accountant to return from holiday!) on an idea I had in terms to a new property development I have been working on.
My business partner and I already own the land and are hoping to get planning permission soon. I live over 100 miles from the development (block of flats that will be rented out) so the development will be run by my business partner, his wife and my father on a daily basis. We have come up with a profit split we are all happy with but I am not sure if it is viable since it hinges on if a partnership can be set up whereby the partners agree a split/share of rental profits that is different to the share of ownership of the land/development. I was thinking it might be possible as of the two partners that are not owners of the land; one is providing funds to enable the build and the other would be helping with running it.
Proposal;
- Set up a new partnership (separate from mine and my business partners current portfolio partnership).
- New development to sit within this new partnership
- New partnership to have 4 Members; Me, my father, business partner, business partners wife. My father will be investing a large amount to enable the build and the wife will help with the running of the development.
- Draw up partnership agreement for profit share 10%, 40%, 25%, 25% respectively
- Due to lender requirements land ownership deeds to remain unchanged (50/50 between two of the partners) - is this ok with HMRC or would the same % profit split need to be mirrored with Land Registry?
A limited company structure was considered but not preferred if this route can work due to the problem of extracting profits.
Any feedback would be much appreciated, im pretty much assuming I have got this all wrong! :)
Replies (10)
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Commercial justification
In theory, profit splits can be whatever is agreed between the partners.
The problem you have here is the family and business relationships. Without equal interests in the assets, HMRC are likely to assert that the profit-sharing arrangements are an artificial scheme to save tax. This is likely to be more of a problem for the husband and wife, as they are both likely to benefit from the whole of the 50% profit assigned to them. However, the fact that each of the two 50% owners end up with 50% of the profit in their family is suspect regardless.
So you need to come up with a commercial reasoning for the split. Work done in running the partnership and supplying funds are likely to be good starting points for justifying this split. Essentially, you want to demonstrate that four independent individuals coming together to run the same business would arrive at the same profit split figures.
Consulting your accountant on the details is likely to be wise.
While I agree.....
....with Stephuran's view of what HMRC would like plus we know the government is working on ways to achieve this, it's not currently the situation. HMRC begrudgingly accept that, for example, a husband and wife partnership can allocate profits as they see fit irrespective of commercial justification BIM72065.
It sounds too good to be true, but it is. Make the most of this "loophole" as it probably won't last much longer (in my view).
Marshall an argument
The more you tie the actual asset ownership to the profit split, the harder it is for HMRC to attack.
But just because HMRC want to disagree with you is no reason to roll over and take it. tonycourt is quite correct that, in theory, husband and wife should be taxed separately and profit splits should be unassailable. That doesn't mean that HMRC won't try to attack the situation as artificial anyway (with varying degrees of success) and any arrangement entered into now needs to be up to withstanding "loopholes" like this. Put together a solid argument now for the commerciality of the profit splits, and HMRC are more likely to leave you alone in favour of easier targets.
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In the situation you set out - as far as I am aware - there is currently no legislation that HMRC can use to reallocate profits between partnership of this type. Also - HMRC would have very little apetite to take up this sort of fight.
I agree that the above is very much belts and braces, but what you set out in your OP sounds very commercial and arms length to me.
As an aside - you could consider allocating a fixed profit share to certain partners. It is very common for partnerships to have different Capital and revenue sharing ratios.
Paranoid, me?
There are various bits of legislation HMRC could claim are relevant, the settlements legislation being the most obvious one. I prefer to have commercial justification from the outset so there isn't an opening for HMRC to start a time-wasting enquiry, even if their reason for opening such an enquiry clearly has no basis in current law.
With the current appetite for anti-avoidance legislation, often with retrospective effect, pre-emption is often wise regardless.
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I'm not saying you are paranoid, It's maybe that I'm too relaxed, I don't know - but certainly the settlements legislation won't apply where partners can clearly justify their keep.
HMRC will not want another arctic systems extending to partnership level.
I can't see them taking this on until they have some legislation to fall back on, which they dont at the moment.
You're not out to get me then?
I was self-mocking. I didn't think you were accusing me of anything.
Having seen HMRC pursue undoubtedly spurious cases in the past, I am maybe a bit OTT on these things. Provided it doesn't create a lot of extra work, it never hurts to strengthen your position to avoid enquiries even starting.