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Overdrawn LLP members account and Closing Down

Tax Consequences

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Hi there,

the scenario I have is as follows.

LLP with members account showing as £10000 Overdrawn by member A, (one member (A) extracted more funds than entitled to with the agreement of the other member(B)). Both members paid tax on their profit share ratio.

Now the LLP wants to close down - member B is happy to write off the balance overdrawn (as it is effectively from member B to the other). The LLP also has a loan which it has been agreed will be transferred to member B.

So upon closing - the loan would transfer to B increasing the amount owed to him. A would effectively be overdrawn but the net liabilities would be owed to B who would allow the closure of the LLP. Does that sound right or is there something that i am missing?

I read on another page as the member is overdrawn then this will create tax liabilities. Would that be as the excess drawn would be taxable on him personally rather than the profit share basis? Even though member B has been taxed on it? (the members are not related either).

Many thanks


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02nd May 2019 10:56

What is the difference between “writing off the balance owing” and giving member A a prior profit tranche (at the expense of member B) to clear it?

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to johngroganjga
02nd May 2019 14:30

Surely one transaction is pre-tax and the other post-tax. That's to say, they seem to me quite different things.

If the partners agree to forgive a debt owed by one partner to the partnership (i.e. to the other members) that's an arrangement between individuals and not relevant to allocation of taxable profits?

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to tonycourt
02nd May 2019 14:38

Yes of course I understand that, but why does member B not want to get tax relief? I know I would.

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By PALacc
to johngroganjga
03rd May 2019 08:24

He purely seems a nice guy?

He is more experienced in business £££ and wanted to give a younger colleague who we worked with the opportunity in business. The profit share ratio was split heavily on his side so he suffered HRT and paid the tax due even though the younger one took in excess of his profit allocation and only paid tax at the lower rate.

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to PALacc
03rd May 2019 09:27

The bottom line is there are no income tax consequences resulting from the writing off the overdrawn account.

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