A Ltd company client has around £100k in a deposit account in the company name earning next to nothing in interest.
The director is looking at transferring this into a deposit account held in his own personal name, to obtain a more beneficial rate of interest.
The funds will still be owned by the company, including all credit interest and will be kept completely separately to all personal money. The director will be merely holding the funds on trust for the company as a bare trustee. The funds will still be shown in the company's books, records and balance sheet etc.
We will be taxing the interest in the company etc and not personally.
The obvious risk here is s455 tax I suppose, or would HMRC be happy that this is still company money?
What are peoples thoughts on this kind of setup?
Replies (17)
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Loan
My thoughts are that you are describing a loan. The company's funds are being advanced to a director's personal bank account. s455 would be in point.
I assume there is some reason why a dividend can't be paid?
Will the bank know about the trust?
One problem is who the bank thinks the money belongs to. Will you be telling the bank that the deposit in the name of Joe Bloggs is actually being held in trust for JB Limited? Will the bank be prepared to give a better rate of interest on deposits held in trust for a company than on deposits direct by the company?
Secondly, do you realise that such a deliberate act of investment may well mean that the company is no longer a trading company and thus prevent any claim for Entrepreneur's Relief on any sale of the shares or business.
This has cropped up before
Bearing in mind Euan's valid points, it is possible to agree with HMRC that the funds belong to the company, thus avoiding s455 and BIK issues. In our client's case, care was taken to ensure that all funds passed only between the deposit account and the company's other bank accounts. Ot at least it was possible in the past - at the time, we were still dealing with local Inspectors that we knew and tended to get along with. In these days of remote Districts and call-centres, such agreement may be harder to obtain.
You must be honest with the bank
You surely do have to tell the bank that the money really belongs to the company otherwise you would be obtaining the extra interest by deception - ie by pretending it belongs to the director personally.
That could be construed as fraud, couldn't it?
Honesty
You surely do have to tell the bank that the money really belongs to the company otherwise you would be obtaining the extra interest by deception - ie by pretending it belongs to the director personally.
That could be construed as fraud, couldn't it?
I'm not sure that I would go so far as to call it fraud. Deception, certainly. Perhaps David W has a view? But I agree that it would be appropriate to make the bank fully aware of the circumstances. In the case I was thinking of, the account name was "J Bloggs as nominee for XYZ Ltd" or something similar. If I recall correctly, the point was not directly that higher rates would be paid to individuals (though the ulitmate aim was to maximise return) but that certain deposit product types were not available to limited companies. The bank was quite happy to proceed on the basis that although the funds belonged to the company the account was in the director's name.
Similar situation
We had a similar situation a few years ago, a client had a large cash surplus in the bank and the director put it into a savings account in his own name while the company opened a business saver.
Typically it crossed the year end date, to account for it we checked the director's savings account. It had a £0 balance at the start and when the money was transferred back to the company the balance returned to £0 - interest paid after the transfer date was then repaid to the company. The director hadn't gained any benefit from holding the funds and everything was transferred back to the company.
When we accounted for it we showed it as a cash balance on the balance sheet as a seperate bank account from the normal current account. We then made a note in the full accounts and also on our Letter of Representation, stating that the director had explained with reasonable evidence that the money was held for the commercial benefit of the company and that he gained no financial benefit from the arrangement which was corrected after date.
There is no issue of deception here
The director would be investing the money in his capacity as trustee for the company. There is no obligation in such circumstances for a trustee to declare that he is acting as such.
There is also no problem at all with S455 provided the documentation creating the trust is drawn correctly. Where money is held as trustee there can be no question of it being a loan subject to S455.
The biggest issue is that investing in a personal name potentially opens up the money to the diector's personal creditors who may be able to look beyond the trustee arrangement and get the money in the event of personal bankruptcy etc. This is a complex subject on which good legal advice is required if there are any doubts.
The only other issue is that the bank will deduct interest at source from personal deposit interest. However, we have never had an issue with claiming this back as a credit against the CT liability for the (several) clients of ours where these arrangements have been in place for many years without issues.
Honesty is the best policy
The director would not "be investing the money in his capacity as trustee" because there is no trust but merely a nominee arrangement (a bare trust is not really a trust at all, except in name!). If there were a trust, the trustees would own the funds and be taxable on the interest. The company would not then be taxable on the interest because it would not own the funds.
Really, it is the company that is investing its money in the name of the director who does not, as mere nominee, have any rights or control over the money and therefore cannot be said to be investing it.
The fact that the director is merely acting as nominee for the company should surely be made clear to the bank otherwise it looks dishonest, especially when it is considered that the only reason for the arrangement is to get the bank to pay a higher rate of interest than it would otherwise have done.
Further
If the bank properly understood the situation - admittedly an unlikely prospect - they should look through the nominee/ bare trust and regard the deposit and interest as belonging to the beneficial owner - ie the company.
They could still make a business decision to pay the higher rate of interest on the grounds that the account was in the name of an individual but they should not deduct personal income tax at source because the interest is beneficially owned by a company. If they did deduct the income tax it is not clear that it would technically be creditable against the company's corporation tax because the deduction would not be authorised by tax law and therefore may not even be tax at all.
No!!
VKR - there is a clear distinction between legal ownership and beneficial ownership. It is the basis of the whole English legal system - the difference between the rule of common law and the rules of equity.
A bare trust is precisely that - a trust. It is NOT "not really a trust". It is common, perfectly legal, and imposes no obligation on the trustees to disclose anything about underlying beneficial ownership to any other person.
So a deposit with a bank in the name of the individual director is correctly treated by the bank as exactly that. The fact that the director has a fiduciary duty to account to the company for the income and capital of the trust of which he is trustee is of no relevance to the bank and, if disclosed to them, wouldn't make the blindest bit of difference anyway.
Yes, but
Under the nominee/bare trust arrangement the company remains the beneficial owner of the funds and the interest. That is why the company is taxable on the interest and why there are no s455 or BIK issues.
It is also why it is wrong to say that the director is investing the funds. He is only a nominee and has only legal ownership so he can't take any decisions about where and when the funds should be invested and can only act solely in accordance with the beneficial owner's wishes. So it is really the company, as beneficial owner, that is investing the funds through a nominee.
Tax works on the basis of beneficial ownership so, if the bank knows the true situation, it should operate the account on the basis that the interest belongs to the company and not the director and so not deduct income tax.
Even if there is no legal obligation on the director to disclose that he is only a nominee for the company (and that will depend in part on what the bank's application form requires to be declared) it would still be dishonest not to disclose the nominee arrangement, especially as the only reason for it is to get the bank to pay a higher rate of interest than it would otherwise pay.
Still not convinced
While I fully appreciate the distinction between legal and beneficial ownership, I am still struggling with this one. When HMRC ask you for documentation proving that the funds are beneficially owned by the company, what exactly will you provide? And how convincing will it be? It will be an interesting conversation with an Inspector at any rate.....
You would provide
1. the declaration of bare trust appointing the director as nominee/bare trustee of the company's funds that are to be deposited in the bank account.
2. the board resolutions approving the nominee/bare trust arrangement and the opening of the bank account in the name of the director as bare trustee for the company together with instructions to the director as to how the funds are to be deposited.
2. the bank statement showing the account as held in "the name of the director as nominee of XYZ Ltd".
On the way back from lunch called in at two high street banks to get application forms to open an account. They both require declaration of the beneficial owner. Hardly surprising in these of days of Money Laundering rules.
As I said before, the bank might be prepared to apply the higher interest rate because the account is held in the name of an individual. But, if the bank understands the relevant tax law, (highly unlikely!) it should operate the account as a company account and not deduct personal income tax because the beneficial owner of the interest is a company, not an individual.
Done it
Had this situation many years ago with an accountant I advised. In that case the client combined the cash with personal cash to achieve a higher rate. The proportion of the interest, etc was correctly accounted for in the company accounts. HMRC (deputy District Inspector at the time) insisted it was a loan and, of course, the documentary evidence was weak.
In the end we went to the General Commissioners and won. What may have clinched it in our favour was the client showing that he paid a large company directly out of the account. I did not know about this until the middle of the hearing!
So yes it can work but create as much docunentary evidence to support it as you can.