Tax Fairness Question

SpeedFreak

SpeedFreak

SpeedFreak

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To be clear, this isn't a point of establishing the right tax payments due, more one of assessing fairness of tax being paid to HMRC by three partners in a property business

A bit of background:

Sibling A - University Degree funded by Student Grant and a higher rate tax payer.

Siblings B & C - University Degrees funded by Student Loans and basic rate tax payers.

All properties are jointly owned. Income goes into a pot and the partnership (not a ltd company) settles all income tax liabilities. Siblings B & C settle their additional student loan repayments that arises from additional property income separately.

Tax liabilities for property profits this year were split as follows:

A. £4600
B. £2300 plus 1000 SL repayment
C. £2300 plus 1000 SL repayment

I have advised that the fair approach to settling this is for the partnership to pay £2300 to each from retained profit and A can then settle the remaining balance as a 40% tax payer themselves.

However, A is saying that the partnership should be paying their entire tax bill. I have challenged this as in my view their personal tax situation is a result of other income sources. Their point is that this burden arises only because they have a share in this business which I feel is irrelevant.

I have countered that if this is the route A wants to take, then the partnership should be also responsible for covering the SL repayments for B&C, with my view that this burden also only arises because they have a share in the business and were also not eligible for student grants, unlike A. I would not view this as strictly correct, but more fair then A's current proposal, however when the student loans are repaid in a couple of years we are facing the same problem. A feels that the student loans are individual issues for B & C.

Any thoughts? Am I being unreasonable, is person A taking the Mick, or are both of us in the wrong?
 
He and I are both accountants. As above, my view is that net profits are distributed one third each and tax liabilities and student loan repayments are individual issues. A thinks I'm being problematic as B and C have never raised this issue in the past (been happening for 5+) years. Whereas I feel I am just protecting the interests of B and C (one of which I am married to).
 
No wonky agreement, in fact I have proposed one in order to split profit in such a way that it maxes B&C to their 20% band which brings down the overall burden of tax ( and is permitted according to HMRC), but he thinks that's a CGT issue (which it isn't).
 
That's the easy part resolved, that I'm not being unreasonable. The hard part is getting this changed without it seeming like I'm being the ****, whereas A, being an accountant should never have allowed this to happen in the first place.

Wish me luck!
 
wonko said:
You're not being unreasonable at all as I see it.
Another thought is that just because A is a higher rate tax payer doesn't mean that they are paying 40% tax on it. If A was putting this extra income into a pension, then they would get tax relief at their marginal rate.
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Also a good point, I do similar to protect my personal allowance.
 
The issue is that rentals can be profitable but if the mortgage repayment is relatively fast then not always cash positive, especially if there are maintenance costs. When the central account needs topped up it is an equal split among the three, but given our income disparity as a couple I effectively cover her share.

Made up numbers but imagine 40k rental income from properties with 10k of allowable expenses and £30k capital repayment. This creates a tax liability of £8k based on the current structure. i.e a net 8k cash outflow. I end up covering her £2.66k "share" of that, when in reality it should only be £2k. Every year. And there's two of them doing it.
 
I was being argumentative on the student loans to get a point across i.e. they are due to personal circumstances so should not be in scope, much the same as the impact of A being a higher rate tax payer.
 
lee1101 said:
There are no dividends if the business is set up as a partnership. He will eventually end up with an overdrawn current account if he takes more than his share of the profits every year. Easiest way is surely just for everyone to take their share of the profits each year so each partners current account is effectively zero (or an agreed amount to leave cash in the bank account). Then everyone sorts out their own tax bill from their own funds.
Click to expand...

I am aware, for tax purposes it is not a divi, call it a disbursement of profits if you like :)
 
platinum87 said:
The OP implies that a liability exists prior to the income, thus requiring income to be paid, to account for the liability.

If person A pays more, this tax liability is now bigger, so they must pay more, further increasing the liability and what springs to mind is Achilles vs the tortoise, however i could be in a state due to sleep deprivation ?
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Agree, it's a self feeding income stream, technically creating a larger liability by iteration.
 
To be clear:

1. No agreement to deviate from equal distribution of income exists. (A has always been higher rate since the beginning BTW).
2. All assets are equally owned, purchases were joint decisions.
3. Ongoing management of the properties is a shared responsibility, including dealing with letting agents, decorating, maintenance and is on the whole fairly balanced.
4. Annual taxable profit is calculated by A, taking revenue and letting fees from letting agent annual statements and costs from a ledger managed by B&C. (In short this is a one hour job every year which I also review on behalf of C).
5. My interest in the partnership is through my wife (C), however when mortgages have been required I am required to provide my own income details as a condition of the lending agreements.
6. As there is a rapid capital repayment plan on the mortgages, the structure is designed as paper profitable but only slightly cash positive at present. Additional costs (e.g. boiler, windows etc...) may require a periodic cash top up. As the main earner in our (Cs) family, C's share is at times covered by me.

The real challenge is that even if my wife does not want to rock the status quo, I believe I have the right to do so. Ultimately it probably won't do me any favours, but my real concerns are around changes to circumstances e.g. B&C become higher rate but there is insufficient cash to cover combined liabilities, who takes the hit considering A has been fully compensated for 5+ years. If A also moves to the upper rate, is the business and by extension B&C expected to then compensate for their marginal 65% rate of tax due to personal allowance unwind....

One thing is for certain in all of this, I will probably be made out to be the bad guy :(
 
How long has the partnership been in existence? And how long has the unequal share been in operation for? It may well constitute an implied agreement, whether that is binding is for a solicitor to comment on.
About 7 to 8 years

Were assets owned individually before being pooled? Are there capital accounts for each partner?
Always shared assets, started via joint parental inheritance.

You may feel that way but surely as an accountant you know you don't really have the right to do so? The fact your wife chose to use your funds for the partnership doesn't give you any additional rights in the partnership unfortunately. Probably the same as the financial information you disclose to lenders.
This is not a point of legality, but A has taken the fairness position in regards to the settlement of taxes. I think it is therefore fair that I challenge them on this given I support my wife financially.

The most worrying part for everyone is if this cannot be agreed amicably. Pushing for a fair split may end up costing everyone far more than the status quo.
It won't come to that, it will probably result in A not speaking to me for a while, but I can accept that :D.
 
You know that is a very good point and one I hadn't considered. A straw man but essentially what you are saying is that at any point in time, where a capital surplus is used to fund a purchase, B&C technically own a larger portion of the current undistributed reserves. By extension they therefore own a slightly higher proportion of any purchased asset.
 
Thanks @Pudney @Foghorn Leghorn @wonko @cheesyboy and others for the input, it's really helpful. I have kicked off the conversation with B & C and am advising that they move to a more formal accounting pack to track effective reserves, partner loans and disbursements etc.... Digging a little further this first became a more prominent point of disparity in the 17/18 tax year when the implementation of Section 24 limited the relief available on mortgage interest for higher rate tax payers to 20%. There were smaller differences before then, but at that time the portfolio was also smaller and rents were 20%+ lower, which I think is why this mostly went under the radar or fell into a "what's a few hundred quid between siblings" rationale. Now things are much more substantial they can no longer manage it in such an informal manner. I'll try to add updates on progress, but expect this will be a slow one!
 
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