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Loan to purchase partnership goodwill and F&F

Accounting for interest on personal loans to buy business

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Evening All,

I have been going round the houses trying to look up how to deal with interest on personal loans for buying goodwill and F&F in a business, but can't seem to get a concrete answer, so I am hoping you wondeful people of AW will be able to point me in the right direction!

Scenario - 2x partners take out £23,800 loan each to purchase goodwill (£19,050) and F&F (£10,000) of a cafe and form a new partnership. The excess of the loans after then paying professional costs were taken privately (about £5,000 each).

When calculating the interest 'allowable' through the partnership, is it the relevant percentage of the loan that was used to purchase the business? Therefore the interest on the drawings element will go to drawings?

Also, as this was a 50/50 split, does this just get processed in the partnership tax return like any other finance cost, or is it added back and processed as an individual expense? My reason for that question is, hypothetically, if only one of the partners took out a loan then both partners would be getting tax relief on the finance costs when it should only be for the person that took out the loan - I think this seems logical, but whether that is correct is another thing.

I have read that for finance interest to be eligible for relief, they must meet this critera: in that period he has not recovered any capital from the partnership, apart from any amount taken into account, in reducing the interest eligible for relief (see ¶115-500)

The partners have taken drawings throughout the year, as their loans are on a 48 month payment plan, does that mean that because they have not used profits to clear their loan that finance interest relief is not allowable? 

Also, would you show these loans in the partnership or process it all through their capital accounts?

Any help/thoughts would be really appreciated.

Thanks,

Kelly

Replies (3)

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By 356B
23rd Jul 2020 12:37

They're both personal loans so they go on the partners personal returns and they're nothing to do with the partnership accounts.

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Replying to 356B:
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By k3lly89
23rd Jul 2020 14:05

Hi 365B,
Thanks for your response. So with regards to the interest, should that not be accounted for or allowable in the partnetship accounts?
Kind regards,
Kelly

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Replying to k3lly89:
Psycho
By Wilson Philips
23rd Jul 2020 14:41

They're personal loans and so interest will be claimed via their personal returns. If drawings have exceeded profits then there has effectively been a return of capital and interest relief would be restricted.

That's the vanilla explanation.

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