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bigduckontax
bigduckontax, Accountant
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There Until last year I was a partner in an LLP. The

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Hi there
Until last year I was a partner in an LLP. The LLP was not profitable over a long period of time and went into liquidation last year with some large debts to HMRC.
I also have an overdrawn capital account to the LLP. The liquidator has invited me to make an offer to settle the capital account and I am assessing the affordability of various offers that I could make. There is one outstanding question which I am struggling to get a clear answer on, from either the liquidator, a second liquidator, or my accountant. That question is whether I would have to pay tax on the written-off portion of my overdrawn capital account.
For the sake of argument, let's say that my capital account is overdrawn to the tune of £50k. If I make an offer of £10k to the liquidator, and that is accepted, then £40k is written off. But, it would make sense to me that HMRC would view that £40k as income that I have received, and would expect me to pay income tax on it.
I need to get an understanding of a) whether that is accurate and b) what the mechanism would be for HMRC being informed of that income and collecting that tax (i.e. via self assessment?)
The affordability of my offer to the liquidator is obviously affected by this question of taxation, as I need to plan for the full amount I would ultimately have to pay.
Could someone provide any clarity here?
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. HMRC do not like LLPs as a result of the exposure of several dubious practices, not to mention downright tax evasion in this area. To HMRC LLP equates to a racket! If your capital account is overdrawn then you should be repaying it in full on the dissolution of the partnership. If the liquidator is prepared to accept a settlement for less than the sum owing then by your figures you would be up some 40K. This would be a capital gain and, after deducting your Annual Exempt Amount (AEA) of 11.1K would leave some 28.9K exposed to Capital Gains Tax (CGT) levied at 18% or 28% or a combination of the two rates depending on your income including the gain in the tax year of dissolution. There is a possibility, if you are going out of this business altogether, that you would be entitled to Entrepreneurs' Relief (ER) which limits the tax to a flat rate 10%. A worst case scenario would be a tax bill of a tad over 8K, but you might get away with just under 3K if ER applies. I do hope that you have found my reply of some assistance.
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Expert:  bigduckontax replied 1 year ago.
Thank you for your support.

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