Partnerships

Question 1

what is a partnership?

Answer 1

two or more persons working together in business with a common view to profit

Question 2

what should partnerships ideally have?

Answer 2

a partnership agreement

Question 3

what is a ‘sleeping partner’

Answer 3

a partner who shares in profits and losses but plays no part in the running of the business

Question 4

if there is a change in profit sharing ratio during the period?

Answer 4

split into two periods to deal with it (before/after the change in profit share)

Question 5

if a partners allocation is described as a salary?

Answer 5

we know that it isnt a ‘real’ salary but instead just a prior allocation of profits

Question 6

what must be considered when calculating profit ratios (dont think this will be overly relevant to me)?

Answer 6

partnership admissions and partners retiring

Question 7

how is loss relief claimed for partners?

Answer 7

individually-no real concept of a ‘partnership loss’. partners should claim loss relief based on their own personal circumstances

Question 8

what sort of loss reliefs are available to partners?

Answer 8

-against cy and py income,
-set against capital gains,
-carried forward against future profits from the partnership,
-new partner can claim the relief in the first 4 tax years where it is carried back to the 3 preceding years,
-retiring partner can claim terminal loss relief
loss relief restrictions apply to each individual partners
(basically the same losses available to sole traders)

Question 9

what does HMRC not allow relief for?

Answer 9

notional losses- i.e say if a partner has a loss bc the other partners get preferential profit allocation. In this case the losses will need to be re-allocated to the other partners.

similarly if a partner makes an artificial profit when the partnership makes a loss- it will be reallocated as hmrc will not tax an artificial profit

Question 10

what is an LLP very similar to for tax purposes?

Answer 10

a general partnership

Question 11

how are llp’s treated for tax purposes?

Answer 11

as if they are transparent (e.g not like limited companies)

Question 12

are members salaries deductible for llp’s?

Answer 12

no

Question 13

what is cumulative ‘sideways’ loss relief/capital gains tax relief limited to for LLP’s?

Answer 13

the members initial contribution to the partnership BUT this does not apply to LLP losses against trading income from the llp

Question 14

when is a member of an llp a ‘disguised employee’?

Answer 14

when they meet the 3 conditions:
-A: disguised salary
-B: no significant influence over the affairs of the llp
-C: no significant investment in the llp (if contribution to the llp is less than 25% of the total amounts of ‘disguised salary’

Question 15

how are capital gains taxed for partners?

Answer 15

each partner is treated as having an underlying share in the LLP asset (same with general partnerships)
can claim rollover relief, BADR etc

Question 16

what needs to be included on a partnership tax return?

Answer 16

details of the gain should be included on a partnership tax return along with details of how it is allocated between individual partners

Question 18

how are proceeds/cost allocated between partners

Answer 18

capital-sharing ratios (which is normally in the partnership agreement), if this isnt specified then it will be the actual destination of the capital surpluses

Question 19

when an asset is distributed out of the partnership to a partner?

Answer 19

st 1-calculate the chargeable gain which would have arisen if all the partners disposed of their fractional shares at mv,
st 2-gains accruing on the partners giving up the asset are immediately charged to cgt,
st 3-gain accruing to the partner receiving the asset is ONLY a notional gain. it is not taxed but it is deducted from that partners base cost.

The above principle also stands for losses- i.e in st 3 the partner receiving the asset has a notional loss which will INCREASE their base cost rather than decrease it

Question 20

if an incoming partner transfers an asset into the partnership by way of capital contribution?

Answer 20

partner treated as having made a ‘part disposal’ of the asset. e.g if partner entitled to 50% of partnership profits they are treated as having made a 50% disposal of the asset (the part they are not entitled to)

Question 21

if a partnership share changes (CGT)?

Answer 21

could be seen as an acqn/disposal for cgt purposes if their share of an asset changes
-proceeds= current balance sheet value of the asset. if there has been no revaluation this will be at a NGNL because the proceeds will be the same as the cost.
It will not be a NGNL if the asset has been revalued (as the balance sheet value will be higher than the cost)