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How to treat company loan to connected company

How to treat company loan to connected company

Ltd company A owned by husband & wife (60:40 shares) and doing very well.

Husband decides to try a new venture (much to our horror as he had no experience in this field) and sets up Ltd company B with same shareholding.

Company A lends £40k to company B at commerical rate of interest (7%) to pay for stock and set up.

Problem arises in that company B makes a large loss in its first year and sells almost nothing. Husband is looking to cease trading and wind the company up.

How do we treat writing off the loan in company A's books?

Does the write off bring no CT relief in company A and would the write off be treated as a distribution to the 2 shareholders? If so, is there any way to avoid this?
 

Advice much appreciated.

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By BKD
14th Mar 2012 12:15

A tax nothing

The debit in A's hands is not deductible, and B's credit is not taxable. End of story.

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14th Mar 2012 12:50

Thanks but would the write off the loan be treated as a distribution by hmrc?

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By BKD
Glennzy
14th Mar 2012 13:14

No

Alwaysreading wrote:

Thanks but would the write off the loan be treated as a distribution by hmrc?

What makes you think that it would be?

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14th Mar 2012 14:41

 

 

The fact that the director loans the money to another company owned and controlled by him.

 

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By BKD
14th Mar 2012 15:16

But ...

... you said that the loan was between the two companies? If you continue to think there may be a distributionn, ask yourself this - "Who has benefitted from the write-off of the loan?"

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15th Mar 2012 09:52

A word of warning

Where a loan between connected parties is written off it should be done so under a formal deed or contractual agreement. It may appear that the combined effect of s354 and s358 CTA 2009 would be neutral, however, HMRC regard a debt as having been released for this purpose only if it is formally released under deed or other legal agreement; not where the creditor simply fails to pursue the debt, whether intentionally or otherwise (CFM 41060).

 

Hope this helps.

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By BKD
15th Mar 2012 10:41

Except that

CFM41060 deals with trade debts, ie deemed loan relationships.

But it's a point well made.

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