Question 5a i
Bex has recently left employment and entered into a business partnership with Amy. Bex requires advice in respect of a loan to the partnership, the calculation of her share of profits and the tax treatment of her redundancy payment.
Amy and Bex partnership:
– Will prepare its first set of accounts for the 16-month period to 30 April 2017.
– Is expected to make a tax-adjusted profit of £255,000 (before deducting interest and capital allowances) for the period ending 30 April 2017.
– The tax written down value on its main pool at 1 January 2016 is £nil.
– Except for the computer referred to below, no further assets will be purchased by either Amy or Bex for use in the partnership in the period ending 30 April 2017.
Profit sharing arrangements:
– The partnership’s profit sharing agreement is as follows:
Amy | Bex | ||
---|---|---|---|
Annual salary | £nil | £30,000 | |
Profit sharing ratio | 3 | : | 1 |
Bex – loans:
– In addition to her capital contribution, Bex will make a £20,000 loan to the partnership on 1 August 2016. The partnership will use this money wholly for business purposes.
– This loan will be financed by a £25,000 personal loan from Bex’s bank, taken out on the same date.
– The remaining £5,000 of the bank loan will be used to purchase a computer for use in the partnership. Bex will have 20% private use of this computer.
– Both the loan from Bex to the partnership and the personal bank loan to Bex will carry interest at the rate of 5% per annum.
Required:
(a) (i) Explain, with the aid of calculations, the tax deductions which will be available in respect of the loan interest payable on both the loan from Bex to the partnership and the personal bank loan to Bex. (7 marks)