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Seeking advice: Interest free loans

Seeking advice: Interest free loans

Hello users of accounting web, 

My aim is to purchase either one or two properties (cash / no mortgage) total value of around £130’000 in the next 12-18 months via a  new limited company (and continuing to acquire them thereafter although my income will fall sharply when I enter training next August and thus at a much slower pace). 

The majority of the money will be accumulated within my contracting company (company A) over this year (profitable company with no debts). This money will be left to accumulate and I only will be withdrawing my tax free allowance/ expenses maximising savings and paying only the corporation tax of 20%. The current plan is to open a separate limited company (company B) for property investment and arrange an interest free loan between the companies, by transferring the funds between these companies I will be able to invest in / acquire properties without having to pay high tax rates on dividends by withdrawing them as income. Transfer pricing legislation enforces the ‘arm’s length principle’ between connected parties (e.g. companies sharing directors) meaning lending should be carried out as it would among independent companies under comparable conditions and thus a repayment schedule with interest would be appropriate however the Small and medium exemption rules would apply to my companies (small company being defined as less than 50 employees and an annual turnover less than £10’000’000).

Have I interpreted this correctly/ is this legitimate way of transferring money between companies and could it be done multiple times? Can anyone see a better option possibly one limited company doing two things? is having a separate limited company the best way to go or at least a reasonable way to go? (as there are benefits regarding having my GF as an equal director for company B being a low tax payer and indeed she would also be investing in the company and could have her 5''000 allowance from april).

Any help would be greatly appreciated 

Scott 

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23rd Feb 2016 13:29

You are right that transferring pricing does not apply and your first company is free to lend interest free to your second one if it wishes to do do.

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23rd Feb 2016 14:57

johngroganjga

John. Interest free loan means uncommercial and clearly not at arms length. Could HMRC not challenge that the loan to Compnay B, is in reality a directors loan and hence s455 applicable, ie 25% tax ?

 

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23rd Feb 2016 16:00

No of course they can't if it is a loan to Company B.  For S455 to apply it has to be a loan to a participator.  Charging commercial interest or not makes no difference to who the debtor is!

 

 

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23rd Feb 2016 16:14

To answer your second question, for future tax planning stick to your plan for two separate companies. If you purchase the properties via your trading company, HMRC could argue that it's an investment company when you eventually liquidate, thus effectively denying you any chance of entrepreneurs relief.

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