Best way to clear directors loan

Best way to clear directors loan

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A husband and wife company with equal sharholding between the two. The husband has an overdrawn loan account and has paid s419. They wish to clear the loan with a dividend, however distributable reserves are only just bigger than the loan account, so is it best to declare a dividend and the wife waive her dividend and the total dividend payment clears the loan. Or can they declare a normal dividend with the husbands dividend clearing approx 50% of his loan account and the wife then gifts hubby her dividend and he uses cash to clear off loan. I presume if option two this would need to be more than a book transaction and the cash should go to wifes bank account and then back again.

Thanks
dave gooding

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By AnonymousUser
12th Mar 2009 11:37

Fairly Common
Its just occurred to me that with windfall shares this must happen all the time, ie shareholders move and forget to update the company, the cheque for the odd say £10 goes out, after 6 months presumably it is written off. I guess there would be an obligation to provide for some of the liability, but eventually there must be some writing off, I wonder what the standard treatment is.

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By AnonymousUser
08th Mar 2009 22:56

Thanks for your help.

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By AnonymousUser
05th Mar 2009 19:54

Hmm bit confused
Thanks everyone maybe I've misunderstood, lets say there are £10K distributable reserves, and the proposed dividend is £5k to each husband and wife.

Per TBB
"And dont forget, the available profit still needs to take into account the waived dividend, even though it is not being paid out." That would mean that the max dividend would be £10k £5k of which is waived, and so the DLA is reduced by £5k and £5k remains in reserves.

But per Penny Chambers
"if the waiver is put in place before the directors declare the dividend, then they can take the waiver into account when determining the dividend level" That would mean DLA can be reduced by £10k

So we seem to get two different outcomes, or TBB were you assuming that the waiver took place after the dividend was declared?

Thanks again

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By AnonymousUser
05th Mar 2009 21:38

Thanks Penny thats great for going forward, I also have a slight problem in that in the previous year they declared say £10k dividend £5K posted to DLA, and left £5k (wifes dividend) payment sitting on balance sheet as a creditor, So can she waive it after its been proposed and not paid? Thanks for your help so far.

Dave

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By User deleted
05th Mar 2009 22:43

No
Once the dividend has been declared it cannot be waived. But you raise an interesting point, one that I have not considered before. Although the dividend itself cannot be waived, she can of course choose not to take the cash. Presumably at some point it would be written off, creating a (non-taxable) credit to the P&L account. Would this then not reinstate the distributable reserves?

The only issue that I can think of is that the dividend would nevertheless remain part of her taxable income - if the reinstated profits were re-distributed, potential double tax charge on the same dividend?

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By User deleted
05th Mar 2009 20:19

Dave
You've got to get the timing right. You are confusing the issue by suggesting that there is a proposed dividend of £5k to each of husband and wife - that is not the way it should be addressed.

There are £10k of reserves (let's say 2 issued shares) and the directors are considering a dividend.

Before they decide on the quantum, one of the SHAREHOLDERS (who may just happen to be a director) lodges a properly constructed waiver. The directors then know that they have £10k to distribute and that there is only 1 shareholder to receive a dividend. They can then declare a dividend of £10k, safe in the knowledge that they will not be distributing more than the available reserves.

As you (and tbb) suggest, the directors could not declare a dividend of £10k per share expecting a waiver to be lodged - it must be in place before the dividend is declared.

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By Orry L Clayton
03rd Jun 2014 13:38

removed

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By User deleted
03rd Mar 2009 17:04

Waiver
And dont forget, the available profit still needs to take into account the waived dividend, even though it is not being paid out.


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