p'ship. sharing profits

p'ship. sharing profits

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H owns land.

Land is used for trading and non trading (schedule A) purposes.

Both activities are profitable.

Proposal to bring W into the business as a revenue sharing partner.  W contributes to the overall profits with her efforts.

Assets will remain outside partneship.

P'ship agreement will say that profits are to be alloctaed as partners agree from time to time.

Q - with regards to schedule A profits, would H & W be able to share these profits in an adhoc basis in the same way as is generally accepted as being ok for trade profits?  Concern is that W has no interest in the Land capital.

Replies (8)

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By johngroganjga
29th Aug 2013 12:12

It's a question of fact. 

It's a question of fact.  None of the property rents are hers unless she acquires some ownership of the property.

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By Steve Kesby
29th Aug 2013 12:25

Agreed

I think more precisely in the suggested circumstances, the profits derived from the land itself aren't partnership profits that can be allocated between the partners, unless the land is a partnership asset. The same needn't be true in respect of a trade carried on on the land though.

Not quite the sme point, but the recent Koshal decision bears out the principles.

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By blok
29th Aug 2013 13:33

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Thank you both

Would you consider that, should H introduce the land into the partnership as a capital contribution, but ringfence the future capital value (both the value contributed and any potential capital uplift on disposal) to his capital account, that it would open up the possibility for W to be allocated some schedule A?  Given that we are now looking at a partnership asset.

Steve, I will read Koshal soon

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By Steve Kesby
29th Aug 2013 14:10

I'd be concerned...

... that any arrangement to ring-fence capital appreciation to the husband would be regarded as having the effect of providing the husband with beneficial ownership, notwithstanding a different legal ownership position.

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By mhtax
01st Sep 2013 16:27

@Steve

I have frequently seen examples where partnership agreements decree different equity sharing compared to the profit sharing ratios. Professional partnerships being a prime example where new partners had to serve time before being able to buy into the equity base. I cannot see how the Koshai decision would alter that being valid. Koshai was a husband and wife arrangement without any documentation in support of a differing ownership position.

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By Steve Kesby
01st Sep 2013 16:43

@ mhtax

What blok seems to be proposing is that land owned by a husband (or I'd assumed H meant husband and W meant wife) is transferred into partnership ownership.

The wife then gets to participate in (and be taxed independently on a proportion of) the income, whilst the husband retains an effective right to all appreciation of the underlying capital.

I accept that it can be done. My concerns, in the above husband and wife scenario, would be either (1) the settlements legislation, or (2) the GAAR operating to give a different effect than that sought.

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By blok
03rd Sep 2013 10:45

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BIM72055 - Partnerships - general notes: sharing profits / losses

Profits, losses or other income may be shared as the partners may mutually agree from time to time (Sections 19 and 24 Partnership Act 1890). The sharing ratio need not be in proportion to contributions of effort or capital. It is not necessary for the partners to share profits and losses in the same proportions, nor income from other sources in the same proportions as trading or professional income. A partner's share of the income on which they are assessable is computed according to their entitlement in the partnership’s accounting period

 

An attack under "settlements" is an interesting debate. one I feel that would only be defeated if the partnership was proven to be bona fide commercial with appropriate deed in place.  I do wonder whether HMRC would have the stomach for that sort of case.

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By Steve Kesby
03rd Sep 2013 11:27

I do agree...

... that HMRC are unlikely to have a stomach for it, at least all the while that it's not particularly big beer.

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