Profit allocation agreement

[Shyam]

I have a flat that is owned by 4 people, an agreement is in place with me and my brother owning 49% each and parents 1% each. I want to set up a profit allocation agreement but wondering will ownership percentage have any bearing on profit allocation? My brother is a student and I am close to the higher rate tax bracket so can I set up a profit share agreement with 100% brother or 90% to him and then 10% to one of my parents?

Also does anyone have an example of a profit share agreement?

[Gordon999]

My suggestion is :

Heading at top of A4 paper : Rental Profit Sharing Agreement

We, the joint owners ( My name, brother name , father name and mother name ) of a property at ( Flat 126 , Queens Gardens, Queenstown ) have agree the annual rental profit to be shared as follow :

brother 80% , father 10% and mother 10%, Me 0%

This agreement on sharing of rental profit commences from 6th April 2014 .

Dated ( )

Signed by

Me + Brother + Father + Mother .

[johnsmith0774]

is it really that simple? i am in a similar situation so am looking to allocate 100% of the rental profits to my girlfriend as she will soon not be working due to having a baby and i pay 40% tax.

do hmrc need to know about the agreement?

[King_Maker]

No, HMRC do not need to know - but you will need to produce it if asked.

Make sure she has her own bank account into which the rents are paid.

[johnsmith0774]

thanks for the information, can we do this even if we are joint tenants?

i am just starting to look into this and im understanding it a bit more now

[Shyam]

Gordon999,

Thanks for this. Can I change the profit allocation agreement ratios each tax year if I need to when my brother starts working or am I fixed to this agreement. My feeling is HMRC will not like it and will want it fixed?

[Gordon999]

There is some spelling error in line starting "We .......: "agree" and "follow" should be "agreed" and "follows" respectively.

The personal allowance for 2014-2015 will be 10,000 and any excess income over the PA will be charged at 20% tax rate.

So you should look at the estimated annual income for brother, father and mother for next 3-4 years and decided if the ratios are suitable to apply in the sharing agreement and income can be largely covered by their annual PAs ?

I suggest your jt owners operate a separate bank account ( without Me name if share ratio= 0%) for the rental income and expenses and any payment to joint owners made according to the ratios in your sharing agreement .

I think "your feeling" may be right so don't invite problems from the taxman .

[King_Maker]

Thanks for this. Can I change the profit allocation agreement ratios each tax year if I need to when my brother starts working or am I fixed to this agreement. My feeling is HMRC will not like it and will want it fixed?

In theory, the profit sharing ratios can be changed each year. But overt manipulation to pay the least amount of tax is likely to be scrutinised closely by HMRC.

However, if there is a sound commercial reason (e.g. one of the parties doing more work), this is less likely to be challenged by HMRC.

[JMansley]

If you are "joint tenants" then your rental profits and capital gains will be divided equally between you, regardless of any agreement to the contrary.

You may wish to change to "tenants-in-common" but you cannot convert back to being joint tenants if you do so. Tenants-in-common can set defined ownership by way of a declaration of trust. If you pursue this route, speak to a solicitor.

[King_Maker]

JMansley,

You are incorrect in respect of the allocation of rental profits between unmarried owners.