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overdrawn partner's account

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Hi

Trading partnership (fish shop), with 3 partners (pensioner parents and son - all working in the partnesrhip). Son admitted as partner in 2014. Son overdrew his account over the years by £40k because of drawing more than profit share. Effectively the son draws all profits. Profit share ratio is 75% to him and 12.5% to each parent. I have a couple of questions: 
How will HMRC treat the overdrawn balance? In my thinking, being treated as gift to him or loan to him is neutral for IHT (it will be either lifetime gift or debt to the estate). Could HMRC change the profit share ratio to agree with the drawings? In my mind the answer is no as tax is on profits and not on drawings. 

Many thanks for the help. 

Replies (4)

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Hallerud at Easter
By DJKL
29th Jun 2019 14:32

Surely there is no gift unless Mum and Dad agree that part of their balances are gifted to him. In long term , though,his excess drawings are not a tenable approach- he owes the sums to the partnership and this position is evidently getting worse and worse.

Re HMRC I have never had issues with overdrawn individual partner accounts, have had the odd issue re loan interest if in aggregate they are overdrawn.

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RLI
By lionofludesch
29th Jun 2019 14:56

Could HMRC change the PSR ?

No, they couldn't.

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By johngroganjga
30th Jun 2019 17:51

I agree with the above responses. You are over-thinking the chances of there being any issues with HMRC. The issue you need to be advising on is how the situation is going to be unravelled. What do the parents want to happen when they die? Do they want their executors be forcing the son to repay his borrowing?

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Replying to johngroganjga:
RLI
By lionofludesch
30th Jun 2019 18:55

johngroganjga wrote:

I agree with the above responses. You are over-thinking the chances of there being any issues with HMRC. The issue you need to be advising on is how the situation is going to be unravelled. What do the parents want to happen when they die? Do they want their executors be forcing the son to repay his borrowing?

And, of course, a factor in that might be who are the beneficiaries of the estate.

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