Hi, I think it is all the same from HMRC point of view, and yes I agree that a loan agreement should be drawn up stating the interest rate and terms.

The difference is that this money will get paid back before the actual 'capital' on winding up of the partnership, and when calculating the profit share of the partners, the interest on the loan will be deducted first and then the remaining profit apportioned to the partners. The interest will be part of the profit share for tax purposes.

EG: If  A loaned £10k with interest at 10% per annum (to keep it simple)

Profit   10,000

Int on loan - A    1,000
Profit share A 1/3 x 9000         3000
Profit share B  1/3 x 9000        3000
Profit share C 1/3 x 9000         3000

So from HMRC point of view A has a profit of £4k (£1k interest and £3k profit share)

B and C each have £3k.

Obviously if the business had only made £1k then A would be paid his £1k and there would be no profit left to share.

Carole

PS yes I would show the loan separately to to the capital

-- Edited by littlebookkeeper on Wednesday 18th of August 2010 10:51:14 AM

Atilla,

if interest is paid on a partner's capital then the calculation would be as Carole has set out.

But the interest is treated differently if the interest arises on a loan. This interest is an allowable deduction when calcualting the partnership's taxable profits (assuming they use the funds in their trade) and the individual partner pays tax on it as investment income.

www.hmrc.gov.uk/manuals/bimmanual/BIM45735.htm

David

Morning Atilla,

If the loan agreement is written up AND complied with in practice (interest paid as per the agreement) And the loan is wholly and exclusively for the use of the partnership then the revenue are happy with that.

Have a look at this from the HMRC website :

http://www.hmrc.gov.uk/manuals/saimmanual/SAIM10280.htm

You've probably seen that one before in your searches but the heading hides the applicable bit which is down in paragraph 3.

Have a look at this thread over on Accounting web as well which talk about the tax relief side of things :

http://www.accountingweb.co.uk/item/167377

Hope that life is treating you well Atilla, I've not been around much recently so apologies for not replying to this one sooner.

All the best,

Shaun.

Cheers Atilla,

Congratulations on winning the partnership job. Hope it proves a gateway to even more opportunities.

cars all sorted now by my normal garage. Cost more to unwind all of the work done by the first garage than it did for them to mess the car up in the first place.

I know what you mean about the work / study equation. Hope that your studies are coming on ok. I must do something soon myself to get IFRS under my belt as the UK GAAP is disappearing imminently.

For your partnership accounts I've found a perfect example, three partners, one partner giving a loan to the business. Unfortunately it's in an old book that's a bit difficult to find. If you can get hold of a copy it's ACCA paper 1.1 Preparing Financial Statements, page 336 to 338 (especially 338). ISBN number is 0 7517 0230 7

Actually, scrap that, I just checked on Amazon and there are 5 used copies from £2.38! It's almost all bookkeeping so unlike the accounting standards texts it's not as though this is something that's going to change. Seriously, it's worth taking a serious look at getting a copy as even though it's from 2002 I still use mine as it's back from the good old days when BPP treated their readers as adults rather than jazzing up their texts to make them look interesting for those who don't find the subject matter interesting anyway.

I think it was one of the phrases from the film Dragnet "Just give me the facts".

I think that you have a similar approach to myself in that I would far rather read an actual standard than someone elses interpreted highlights of it. If so, you would prefer the BPP ACCA study texts under the old syllabus (pre 2007). I've now pretty much switched over completely to Kaplan study texts where one has to have the latest edition (anything concerned with current standards such as F7, F8, P2 and P7).

Hope to talk soon,

All the best,

Shaun.

Hello,

I am a student from Germany and I write a thesis about partnerships in Germany and the UK. This forum here acutally fits exactly what I am looking for. But to me it's still not clear how you handle a loan from a partner to a partnership. Some of you say interest will be part of the profit share (Carole) and others say it's part of the investment income (David). I would be very thankful, if you can help me.

The reason why I am asking is, that in Germany it is very common for partners to give a loan to their partnership. The reason is, that tax on interest is lower than tax on trading income. So the German state doesn't allow this and interest is apportioned to trading income.

My question now is, how a loan from a partner to a partnership is treated. So there is no bank or something involved. The partner takes his private money and gives a loan to the partnership. I would think, that the interest on the loan is deductable on partnership level and the interest is investment income on the partner's level. How are the tax rates then? Am I right with that? Some of you say it is kind of trading income, others say its investment income. So what's right now?

I would be really happy if someone could help me.

Example (that's the way I understood it)

two partners A and B


Loan from Partner A to Partnership 10.000, interest 10% --> interest 1.000

profit of partnership: 100.000
./. interst : 1.000
_________________________
: 99.000

profit income for A and B each: 44.500 (maybe higher tax rate)
investment income for A : 1.000 (maybe lower tax rate)


Thanks a lot, hope someone understands what I wanted to ask

Tobias

-- Edited by Germany on Wednesday 6th of October 2010 11:21:41 AM

-- Edited by Germany on Wednesday 6th of October 2010 11:24:12 AM

Hi Bill,

thanks for the information. But I still don't totally get it.
So does it not make any difference for taxation, whether the partner gets it as interest or as part of the profit? Is it all just put together and taxed with the individual tax rate of the partner?

Above, David wrote this:
"if interest is paid on a partner's capital then the calculation would be as Carole has set out.

But the interest is treated differently if the interest arises on a loan. This interest is an allowable deduction when calcualting the partnership's taxable profits (assuming they use the funds in their trade) and the individual partner pays tax on it as investment income.

www.hmrc.gov.uk/manuals/bimmanual/BIM45735.htm

David
"

He says, that interest is treated differently. So what does he mean? He says the partner pays tax on it as investment income. So is there a difference between trading and investment income? What exactly is investment income, is it taxed differently?
I have only found different tax rates for dividends and saving income.

Do you know what I mean?
If interest and trading income is taxed equally, what is the sence of deducting it? The partner could just get the interest on partnership level as part of his profit if there wouldn't be any difference, like in Carole's example:
_______________________________________________________________
EG: If A loaned £10k with interest at 10% per annum (to keep it simple)

Profit 10,000

Int on loan - A 1,000
Profit share A 1/3 x 9000 3000
Profit share B 1/3 x 9000 3000
Profit share C 1/3 x 9000 3000

So from HMRC point of view A has a profit of £4k (£1k interest and £3k profit share)

B and C each have £3k.
_________________________________________________________________

Is this deduction only for transparency or does it also have any influence on taxation?

Thanks a lot
Tobias

Hi Attila

I think the question is whether the interest earned attracts a lower rate of tax.

To be honest, I am not sure of the answer myself but as David states, interest on a loan to the partnership appears to be by definition investment income and not income from a trade. However it does not fall into the dividend class of investment which has lower tax rate (deducted at source) and is not bank/ building society interest, which carries standard rate tax. Unfortunately, so far, HMRC website is as useful as a chocolate fireguard and I have not found anything that comes close to a difinitive answer yet.

Bill

By the way, here I found to links, which also write something about the treatment of interests and salaries. But it also says, that

"Interest on loans from a partner is accounted for as an expense in the profit and loss account, and NOT AS AN APPROPRIATION OF PROFIT, even though the interest is added to the current account of the partners."

and as I mentioned above, in my book it says
"Partner's [...] salaries are AN APPROPRIATION OF PROFIT, not a deduction in calculating it."

So there should be a difference between salaries and interests, I think.


This here you can find at one of these links:
"Where the agreement provides for the payment of salaries to partners, it should be appreciated that such payments, although designated salaries are, like above expenses, merely in the nature of preferential shares of the divisible profit. The amounts such salaries should therefore be taken into account in the statement of allocation of net profit."

http://ezinearticles.com/?Partners-Accounts-and-Allocation-of-Profits&id=4763447

http://ezinearticles.com/?Capital-Account-and-Current-Account-in-Partnership&id=4722212

Hi,

yes it is right I think.
Interest is expense in terms of the business but it is income to the partner as an individual. The business(partnership) accounts for it same way as it would do with a bank loan but that is going to be extra income to partner A as an individual.

Salaries of partners are appropriation of profit, they don't go to expenses. As you wrote above £10000 profit. Agreed salary to A is £1000 and profit sharing is after salary paid. A, B and C £3000 each.
Partners salaries are appropriation of profit, it is an income to partners before the residual profits shared out.

To confuse matters partners can agree in a minimum appropriation of profit even if the business makes a loss where in certain cases reallocation of profits needed (i.e. when the partner with guaranteed minimum would not get the minimum profit agreed) - even if the other partners will have to take a loss.

About paying income tax on loan interest as an individual, I would think it is the same as it would be with directors loan in an ltd so partner A would have to pay 20% basic rate as the business/partnership did not deduct any taxes from the loan interest paid to A, it have to be included in SA tax returns in box 2 - untaxed UK interest - that is where you should put even things like loan interest from loans given to family mambers, other individuals or organisations.

That is my opinion, maybe someone will say otherwise...

-- Edited by attilabenko on Thursday 7th of October 2010 05:40:36 PM

-- Edited by attilabenko on Thursday 7th of October 2010 05:46:55 PM

-- Edited by attilabenko on Thursday 7th of October 2010 05:50:25 PM

Hi Bill,

I found info about interest on these sort of loans on HMRC - can't give you a link, I would not be able to find it again myself. You know, one of those you click on something what takes you somewhere, where you click on another link and in a new window you find one more and all this within HMRC website.... and I found a bit more info on the matter in the Big Book - Guide to SA tax returns ( not a lot of info, a couple of lines)


-- Edited by attilabenko on Thursday 7th of October 2010 06:49:06 PM

Well, you see if you would have to pay significantly less income tax on loan interest than on salary, everybody would loan to the business on high interest instead of taking salaries or profit income and as it is at the moment if there is a legit contract for it HMRC could not do much about it. That is the only way it would make sense to me if I would be Inland Revenue....
That is just an opinion ;)

Hi Attila and Bill,

I have another question. Would be nice if you had some links or some information about this. Do you know how pension contributions paid by the partnership are treated? Are they deductable from trading profit? And when are they taxed by the partners? When they receive the payments when they are retired or are they taxed at the moment when the partnership makes the contribution?

Hope you understand what I mean.

Tobias

Hi Tobias

If the partnership is paying the pension contributions of the partners then this will be treated as a drawing from profits.

I have not fully investigated this but I can't see any reason why it should be any different say, to the partnership paying a partners mortgage.

Bill