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Linking Director/Shareholders Mortgage Account to Personal Company Account

 My clients, a married couple, have a mortgage and own a company that is running a substantial surplus on a bank account with the same bank.  The bank (one of the large banks) has suggested linking the accounts, which would save significant amounts of interest for my client.  The bank seems to be suggesting (I'm not 100% clear) that money is siphoned off from the company account into a personal account and repaid immediately before the end of the company's accounting year and/or that the company opens an account in the name of one of the directors.  This raises a number of issues, eg:

- whether the Companies Acts rules on loans to directors are breached, and the implications if they are (the company is unlikely to have creditors who would object, for example).

- how the benefit in kind rules are impacted: would there be a tax charge on loans?  can it be got round by the company charging its directors a commercial rate of interest?  would the linkage of itself involve a chargeable benefit in kind?  again, could this be got round by the company charging a fee for the service?

- does the company's bank account need to be in its own name? could, for example, my clients have an account in their personal names which  is operated in trust for the company, provided they are scrupulous about not using the money for personal expenditure?

I'd welcome any thoughts, or relevant experiences, others have had.

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14th Jul 2011 19:24

Keep away

"The bank (one of the large banks) has suggested linking the accounts, which would save significant amounts of interest for my client.  The bank seems to be suggesting (I'm not 100% clear) that money is siphoned off from the company account into a personal account and repaid immediately before the end of the company's accounting year and/or that the company opens an account in the name of one of the directors."

For what purpose? Why should any interest be saved? There's something more to this. It all sounds very confused.

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15th Jul 2011 12:57

To clarify...........

 The details of how the bank want to do this are a bit confused, but I think the basic principle is clear enough.

Where a mortgage holder has another account in surplus some banks will allow offset - eg, you have £100,000 mortgage and a savings account £60,000, the bank will link the accounts and charge interest on your "net borrowings, £40,000, rather than charge interest on the £100,000 and pay (negligible) interest on the £60,000.  It's potentially a very advantageous arrangement.

My client's problem is that the "surplus" account belongs to their company, not themselves personally.  The bank is suggesting they can still be linked.

Methods suggested seem to be:

1. transfer the company surplus to the morgage account at the beginning of the accounting period and transfer it back at the end (presumably to avoid adverse consequences of director's loans). 

2. Put the company funds in a personal account, presumably held in trust for the company, to allow linkeage.

What is slightly confusing is that presumably you'd do one or the other, not both.  But I'd be interested in views of whether either scenario can work.

 

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15th Jul 2011 13:21

Legal advice?

“The details of how the bank want to do this are a bit confused, but I think the basic principle is clear enough.

 Where a mortgage holder has another account in surplus some banks will allow offset - eg, you have £100,000 mortgage and a savings account £60,000, the bank will link the accounts and charge interest on your "net borrowings, £40,000, rather than charge interest on the £100,000 and pay (negligible) interest on the £60,000.  It's potentially a very advantageous arrangement.”

I know that when two accounts are owned by one person they can be linked but this is certainly not the reality as you have set out.

“1. transfer the company surplus to the morgage account at the beginning of the accounting period and transfer it back at the end (presumably to avoid adverse consequences of director's loans).”

If the balance goes over £5k and less than a market rate of interest is applied then there’s a benefit in kind charge.

“2. Put the company funds in a personal account, presumably held in trust for the company, to allow linkeage.”

If the money is held in trust for the company shouldn’t a market rate of interest be paid to the company? I don’t see how the “trustee” gaining from this transaction is not a breach of trust. Maybe declaring it makes it so.

I would consider getting legal advice rather than relying on the bank’s advice.

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15th Jul 2011 14:40

Two aspects
"The bank seems to be suggesting (I'm not 100% clear) that money is siphoned off from the company account into a personal account and repaid immediately before the end of the company's accounting year" indicates that the bank is perfectly well aware that this is a loan by the company to the individual director.  There is no suggestion of linkage between a bank account in the company's name and a mortgage account in the individual's name.  As it would be a loan to an individual participator, it would be subject to the 25% s.455 refundable tax charge if not repaid by the year-end (or within 9 months after) and as Peter says with a loan in excess of £5,000, there would be a BIK unless interest is paid to the company of at least 4% p.a., which would eliminate most of the benefit to the individual, although it would benefit the company.The "can an individual hold a bank account in trust for a company?" aspect.  Some argue that it is possible if a trust deed is properly drawn up in advance, but you would need rock solid legal advice on this and confirmation from the bank that the funds in the individual's account are held in trust for the company.  This would avoid the tax consequences of option 1 and would entitle you to account for the individual's account as an asset of the company.  However, the bank might well not be prepared to give any such confirmation as they clearly intend these mortgage offset arrangements to be a linkage between accounts held by an individual.  Unless you can get the bank's confirmation that the funds are held in trust, option 1 applies.

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15th Jul 2011 16:21

Thanks

 Thanks very much for the responses.  Euan that is a comprehensive and very useful answer.  And judging by your picture you're pretty easy on the eye as well!

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15th Jul 2011 16:32

Meeting?

I think you two should meet up. It certainly would be interesting!

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