Tax Fairness Question

[Demon]

Yeah, can't call it stealing.

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.

And this is the issue, "A" can't assert that the business need offset his additional tax burden and ignore the Student Loan aspect of "B" and "C".

If this is the logic "A" wants to play be, then I'd say that "B" and "C" could make the argument that if "A" is already a higher tax rate payer even without the additional income, and "B" and "C" are only pushed over their student loan limit due to the additional income that the business need not pay "A" any more, but should make recompense to "B" and "C".. The logic is as flawed as "A"'s but that might get the point across.

See how he wears, that, then offer the "OK, lets just make it all equal and ignore personal financial situations.."

 

[Pudney]

And this is the issue, "A" can't assert that the business need offset his additional tax burden and ignore the Student Loan aspect of "B" and "C".

If this is the logic "A" wants to play be, then I'd say that "B" and "C" could make the argument that if "A" is already a higher tax rate payer even without the additional income, and "B" and "C" are only pushed over their student loan limit due to the additional income that the business need not pay "A" any more, but should make recompense to "B" and "C".. The logic is as flawed as "A"'s but that might get the point across.

See how he wears, that, then offer the "OK, lets just make it all equal and ignore personal financial situations.."

You can't say this. For all you know the agreement was that the partnership would settle all income tax liabilities and then distribute remaining profits equally (or unequally). If that was the agreement then so be it. Questions of fairness are irrelevant, particularly if A only entered into the partnership on the understanding it would first pay out income tax liabilities and then distribute remaining profits and that was part of why they agreed to the arrangements in the first place.

Obviously life would have been a lot simpler for everyone if they properly documented this from the outset. Never do business on verbal agreements alone!

 

[Foghorn Leghorn]

Yeah, can't call it stealing.



And this is the issue, "A" can't assert that the business need offset his additional tax burden and ignore the Student Loan aspect of "B" and "C".

If this is the logic "A" wants to play be, then I'd say that "B" and "C" could make the argument that if "A" is already a higher tax rate payer even without the additional income, and "B" and "C" are only pushed over their student loan limit due to the additional income that the business need not pay "A" any more, but should make recompense to "B" and "C".. The logic is as flawed as "A"'s but that might get the point across.

See how he wears, that, then offer the "OK, lets just make it all equal and ignore personal financial situations.."

Reread the thread, he's either a crook or incompetent.

They may well be continuing an existing agreement, but doesn't mean he hasn't been screwing them over from the beginning or is incompetent.

 

[Mercenary Keyboard Warrior]

You can't say this. For all you know the agreement was that the partnership would settle all income tax liabilities and then distribute remaining profits equally (or unequally). If that was the agreement then so be it. Questions of fairness are irrelevant, particularly if A only entered into the partnership on the understanding it would first pay out income tax liabilities and then distribute remaining profits and that was part of why they agreed to the arrangements in the first place.

Obviously life would have been a lot simpler for everyone if they properly documented this from the outset. Never do business on verbal agreements alone!

Very much how I see it. Its quite possible when it started none were higher rate tax payers and the agreement to settle tax from the profits before distribution was a completely equitable agreement.
If however A was already a higher rate taxpayer, you could argue they knew very well what they were doing, although as you said, nothing specifically wrong with that, just a bit underhand

 

[SpeedFreak]

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

 

[dlockers]

How did point 1 ever come about though? I mean it isn't hard maths to see that person A gets the most pound coins?

Has 'A' done the maths on a "pure cash" basis and post tax it works out they all get the same 'in their wallet'?

Can you suggest that at the end of the 5 year period of this current arrangement is a good time horizon to now have a think about how it works going forwards, considering lots of maintenance is typically due in the next 5 years versus the previous 5?

 

[Foghorn Leghorn]

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).

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

To me, seeing you as 'problematic' means he knows what he's doing and he's relying on his siblings trusting him. I'm annoyed for you,I'd be livid if it was happening to my wife.

 

[Pudney]

To be clear:

1. No agreement to deviate from equal distribution of income exists. (A has always been higher rate since the beginning BTW).

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.

2. All assets are equally owned, purchases were joint decisions.

Were assets owned individually before being pooled? Are there capital accounts for each partner?

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).

All fairly normal.

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.

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.

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

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.

 

[SpeedFreak]

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 .

 

[Jokester]

To be honest anyone that is quite happy to shaft their brother/sisters like that probably isn’t worth speaking to!

 

[Pudney]

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 .

I'm not necessarily just coming at this from a legal standpoint, more from a view that this is a family arrangement, which ultimately you are an outsider to, and approaching it with a stance that you have a right to do so and are entitled to do so may not be constructive to the issue. Obviously you know the dynamics better than I do though! It does seem though that this arrangement has been implicitly agreed to for a reasonable time and only now are you attempting to intrude on the sibling agreement.

 

[Hades]

As the main earner in our (Cs) family, C's share is at times covered by me.

You're paying A's tax bill. That's very nice of you.



** Yes it's a flippant comment. But if A is getting a higher payment then C will be getting a lower payment, subbsidising A. Therefore when a cash injection is needed, you have to help out. If C got a "fair share" then you wouldn't need to subsidide her/him.

 

[Pudney]

You're paying A's tax bill. That's very nice of you.



** Yes it's a flippant comment. But if A is getting a higher payment then C will be getting a lower payment, subbsidising A. Therefore when a cash injection is needed, you have to help out. If C got a "fair share" then you wouldn't need to subsidide her/him.

That’s unlikely to be correct. Cash injections are needed because of capital repayments on mortgages, that doesn’t impact profit generation. There’s paper profits but it’s cash neutral-ish.

 

[Pudney]

Are the tax numbers in the OP representative? I’m not actually sure what the problem is if they are…

 

[arknor]

so if B and C suddenly started paying a higher tax rate do they get a higher share?

 

[SpeedFreak]

Potentially yes, but then it's just equal. Although I doubt they will ever have to.

 

[SpeedFreak]

Are the tax numbers in the OP representative? I’m not actually sure what the problem is if they are…

Illustrative but ball park.

 

[Pudney]

Illustrative but ball park.

That's quite important then. Because those tax charges are all going back to the same profit share each. Which means the profit share is, in fact, the same for each partner.

What I think is happening is that Sibling A is drawing down on his profit share faster than B+C by using partnership cash now. But that means B+C have more to draw down on in the future (tax free) when the cash is available.

Your OP isn't actually a question of profit fairness, it's a question of cash extraction from the partnership bank accounts, which is different. Sibling A has the advantage now but B+C have greater amounts in the future.

 

[SpeedFreak]

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.

 

[Pudney]

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.

Probably not quite correct if the partnership is being run sensibly. Consider it this way:

• Ltd company with 3 shareholders.
• £45k profits after CT a year.
• Each year the entire profits are voted as dividends.
• Shareholder 1 takes £4,600 of the dividends and leave as a loan outstanding. The others take £2,300 and leave the balance as a loan.
• Shareholder reserves don't increase year on year as all profits are distributed.
• Shareholder entitlement to net assets don't change year on year as they each remain a 33% shareholder.
• Current or long-term liabilities will increase each year as each shareholders' loan accounts increase.

There is no such thing as undistributed reserves in a partnership, so everything gets distributed each year. The one thing that could work in the way you suggest is that the unpaid profit shares are taken to a capital account, as normally share of partnership assets are considered in light of capital contributions. However, a sensible accountant would be taking unpaid profits to either the Partner's Current Account or treat as a loan.