A client of mine is 100% shareholder of a limited company. He had advanced a loan to the company some 4 years back. He is now looking to write this off as the company does not have funds to repay him. The company may decide to go into dissolution, but this has not yet been decided.
May understanding is that connected party debts released are exempted for tax purposes under FA96 sch9. But reading S87 it seem to me that this exemption only applies if both parties are connected. My knowledge in the area is grey. Would someone be kind enough to point me to the right direction here. The queries are:
1) Are the loan relationship rules only applicable to companies?
2) If the loan is written by my client (the individual shareholder), will it be taxable in the company?
3) Could the situation have been different if the shareholder was another company?
Many thanks for your help
L Rob
Replies (4)
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Control?
What if say 4 shareholders/directors
they all set up co as an EIS vehicle with say minimum SC (6k, 6k, 4k, 4k)
they all loaned monies to company - the co is possibly going to be struck off
s/h want to claim s253 TCGA loss but would they be connected as individually do not control
other complication is the individuals with 4k sc hold 10k each (6k as niminee)
Any thoughts?
Thanks Ken !!
I've been looking for an answer to this question for about 6 months!
I have a credit balance director loan account that needs writing off too, however in a different scenario.
The parties are connected ...
... because the shareholder has control as defined by section 87A FA 1996, which merely requires a simple majority. However, specifically,
1. Loan relationship rules apply only to companies
2. No - it would appear not since para 5 of Sch 9 says that where the parties are connected the debtor does not bring any credit into account.
3. No if the companies were controlled by the same person (not persons).
Thus the company has a loan relationship with the shareholder; the shareholder does not have a loan relationship with the company. However, what need is there for the loan to be written off anyway? It's still legally due until either it is formally released or the company ceases to exist, but so what? Am I missing something?
The rules for capital losses on loans to traders under s253 TCGA is a separate issue but does not hinge upon whether the loan has been relased or written off but upon whether it has "become irrecoverable". Relief under s253 cannot be claimed if the loss has been relieved under the loan relationship rules. However since individuals cannpt claim relief under loan relationship rules, this is of no consequence here, so a capital loss claim may be made provided of course it can be
shown that the loan is irrecoverable.