Butterworths direct advises that the amount written off is treated as net income received after deduction of tax at the Schedule F ordinary rate which I understand to be the dividend rate of 10%. The grossed up amount is charged to tax at the higher rate of 32.5% and the notional tax at 10% is allowed as a credit. The tax is therefore 25% of the loan amount written off. Can someone confirm this treatment as HMIT is treating loan amount as additional Sch E earnings taxed at 40% with no relief.
trevor
Replies (9)
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HMRC guidance on the release or write-off of a loan can be found at CTM 6663.
S421 ICTA should intervene to ensure that the loan release is taxed as distribution. This should take precedence over the benefits code according to their guidance (it refers to s160 ICTA, now s188 ITEPA). It might also be worth looking at s189 ITEPA.
You do need to be slightly careful that a s419 charge has or would have arisen. If the exceptions in s420 apply then the release of the loan would probably end up being charged as employment income.
Finally, it is worth looking at the NIC position as well. There was a good article on this in Taxation by Roger Jones on 7 October 2004 entitled 'Small Family Companies'.
nic
The write off ofthe loan counts as earnings for nic purposes - refer to Revenue Manuals EM8623.
As Ken Moody says...
...it was in Taxation magazine. The link is:
http://www.taxation.co.uk/Articles/2004/10/07/46095/Small+Family+Companies.htm
And what happens in this scenario?
A director has a loan account which has been written off. It's for £2,498; £98 of called up share capital unpaid and £2,400 for a "genuine loan".
The director/shareholder is now deceased (and has been for two years or so), so there is no chance of recovery. Employer now needs to write off the loan.
How is this treated for tax purposes now?