Tax Implications of director account Credit balance w/off

Tax Implications of director account Credit...

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I have a client Company which has 2 directors/shareholders. Both have have invested personal funds into the Company about 90K each. Now one of the director/shareholder is leaving and the remaining shareholder has bought his shares for £50K. As part of the deal the outgoing director has agreed to waive the credit balance in his directors account. What are the tax implications of this write off? As a loan is being written off is this income for C tax purposes?

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By User deleted
03rd May 2012 17:03

Yes

Taxable.

And for the individual's position, have a look at TCGA 1992 s253.

I assume you're happy that the £50k represents the open market value of the shares?

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By alattax
03rd May 2012 17:50

Without seeing the terms of the contract, I'd say with these sort of agreements it is unlikey to need to be written off.

It is probably being transferred to the purchaser as part of the deal, which the purchaser can draw on in the future.

 

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By pingu10
03rd May 2012 18:20

Probably true but

as is typical the deal was done before we knew about it. What seems to have happened is that business is not going anywhere and he guy wanted out so the other offered him 50K. The Company in the forseable future will  not be able to repay the loaned amount nor make any significant profits.

Why is the write off liable to corporation tax?

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Replying to carnmores:
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By User deleted
03rd May 2012 19:30

Write-off

pingu10 wrote:

Why is the write off liable to corporation tax?

What makes you think that it wouldn't be?

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Replying to Jim100:
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By thisistibi
04th May 2012 08:46

Well...

BKD wrote:

pingu10 wrote:

Why is the write off liable to corporation tax?

What makes you think that it wouldn't be?

Perhaps because the write off of an overdrawn director's loan is non-deductible.... so it would be unfair if the release credit was taxable.

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By User deleted
04th May 2012 09:17

Unfair, perhaps

But who said that tax has to be fair?

The credit is one arising under loan relationship legislation and in absence of a specific exclusion it will be taxable,

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