Company funds held in a personal bank account

Company funds held in a personal bank account

Didn't find your answer?

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)

Please login or register to join the discussion.

avatar
By thisistibi
19th Jun 2012 09:54

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?

Thanks (0)
Euan's picture
By Euan MacLennan
19th Jun 2012 09:57

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.

Thanks (0)
avatar
By Simon K
19th Jun 2012 10:05

A dividend could be paid but higher rate tax would be charged, the director does not want the money anyway - he just wants a bit more of a return on the company funds.

I guess the issue with regards to the bank knowing whose money it is, is part of my question really.  Do we have to tell them? If so, will they give us interest rates at personal or corporate levels?

I would hope that the second point with regards to the company becoming an investment company would not be relevant due to this transaction not being significant when comparing to the company's other assets and activities.

Thanks (0)
avatar
By User deleted
19th Jun 2012 10:10

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.

Thanks (0)
avatar
By v k ratliff
19th Jun 2012 10:29

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?

Thanks (0)
Replying to Myshkin:
avatar
By User deleted
19th Jun 2012 10:39

Honesty

v k ratliff wrote:

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.

Thanks (0)
Replying to stt:
avatar
By Simon K
19th Jun 2012 11:03

"J Bloggs as nominee for XYZ Ltd" sounds ideal!

BKD wrote:

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.

That is interesting, and would suit my situation perfectly if the bank were willing to do so.  Would also look better from HMRC point of view if the company name appeared on the account (rather than just a solely personal account).

Thanks (0)
avatar
By twj4789
19th Jun 2012 13:10

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.

 

Thanks (0)
avatar
By MBK
19th Jun 2012 13:35

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.

Thanks (0)
avatar
By v k ratliff
19th Jun 2012 16:45

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.

 

Thanks (0)
avatar
By v k ratliff
20th Jun 2012 06:54

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.

Thanks (0)
avatar
By MBK
20th Jun 2012 07:57

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.

 

Thanks (0)
avatar
By v k ratliff
20th Jun 2012 10:23

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.

Thanks (0)
avatar
By thisistibi
20th Jun 2012 12:42

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.....

Thanks (0)
avatar
By v k ratliff
20th Jun 2012 14:12

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. 

Thanks (0)
By gbuckell
22nd Jun 2012 11:26

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.

Thanks (0)
avatar
By Simon K
22nd Jun 2012 11:35

Thanks for all the replies, some interesting and somewhat conflicting views!

Certainly seems a bit of a grey area as to whether this is acceptable practice...

Thanks (0)