Does changing debt from personal to company in order to save tax make sense?

Does changing debt from personal to company in...

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A client bought a business using loan arrangement in his own name - loan still has 6 years to run

He then incorporated this business - he could not do it when he bought it

The business pays the loan and because it is in his personal name the payments are debited to his DLA and interest is dealt with through a CT61 arrangement.

Because he is a HR taxpayer he has to have larger dividends and resultant tax bill to cover his DLA drawings (of which the loan repayments are part)

Does it make sense to swap the loan into the company and pay more interest in so doing - should it just be a comparison between extra 22.5% tax and the after tax cost of bank charges and interest over the remaining life of the loan?

Am I missing anything here or do I just do the maths and advise my client accordingly

Thanks all

Replies (6)

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By chrisdxuk
23rd Jul 2010 16:45

Bit confused

Why if, loan wholly and solely to purchase company have you been paying via DLA? Should not the creditor, the outstanding loan, be in company's books anyways as reflecting investor's acquisition. I think you have maybe put to many steps into the arrangement

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By spayne
23rd Jul 2010 17:06

Clarification

Loan was to buy the business which was an unincorporated entity - he then incorporated about 6 month afterwards when by law he was able to (dentistry) - loan was not to buy the company

Does this help

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Stepurhan
By stepurhan
23rd Jul 2010 17:52

How is loan to be transferred?

You are talking about swapping personal debt for corporate debt as if it as simple as the director signing over the obligation. I think you'll find it is not as easy as that. As far as I can see, in order to take over the loan the company would have to take out a loan and give the director the money to pay off his personal loan. In the situation as it appears from your description this would almost certainly be a taxable lump sum in his hands.

The point I think you need to re-examine is the incorporation. The loan was taken out to purchase the business. The business was then introduced into the company. Did the director not get a credit for the valuable assets he was introducing to the company? If there was only six months between the original purchase and the incorporation then the value may have been the same as the purchase price. (though you might need to consider gathering evidence of that in case of HMRC query) There would therefore be a large credit balance on the DLA from introducing this asset. The company could then take out a loan to repay this balance (effectively pay the director for the business it acquired from him) and pay over those funds without tax consequences (repayment of creditor due, not additional income of director.) With purchase and sale of business at same value there shouldn't even be any CGT considerations.  

To clarify some confusion over the first reply. If the loan had been taken out to purchase the company (i.e. the shares) then that would have been a wholly personal matter (solely for the benefit of the shareholder, not the company). I think the original respondent was wondering why the purchase of the business hadn't been performed using finance within the company in the first place. Though I'm not clear on the reasons, you've already said this wasn't possible.

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By spayne
26th Jul 2010 09:47

Clarification

Thanks stepurhan

yes the company takes out the loan and the bank changes the indebtedness for personal to company , charges a fee (exorbitant) and ups the interest rate. The company does not give the money to the director the bank does - since the indebtedness is not within the company - I don't see how this is taxable in the directors hands?

Anyhow the purchase of the business and the loan being taken out happened  a 3/4 years ago so the directors loan account hase moved on and largely has been use to pay back the director and/or reduce the tax liability (22.5% on HR dividend payments)

His Directors loan account (DLA) is now very small so any dividend attracts 22.5% - Because the loan is in his name the loan repayments are effectively a private arrangement and debited to his DLA thus resulting in a bigger dividend. Hence the question

Hope this helps understand the situation

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Stepurhan
By stepurhan
26th Jul 2010 11:06

Benefit by virtue of office

Whether the money actually passes through the director's hands is irrelevant. Before the director has an outstanding loan. Afterwards he doesn't. He has therefore received a benefit (the loan being cleared) as a result of his being a director of the company. (the only reason the bank is paying over the money is because the company is taking out an equvialent loan). This is the same principle as if the company paid his personal expenses. You will no doubt argue that, as the money goes direct from the bank to pay off the loan, then the company is not the one making the payment. That would be, at best, disingenuous. The company would be taking out the new loan so the funds are theirs. Paying off the director's loan is merely the bank following instructions on the use of company money (in much the same way as if the company had written a cheque instead).

I still do not understand how the director could have introduced a, presumably valuable, business into the company without receiving a matching credit. You say the loan account has moved on but it sounds like dividends have had to be paid to cover the loan repayments from the start. That would suggest that no credit at all was created when the director introduced the business and, as a result, the director has been subject to tax on payments that should have simply been repayment of a credit for assets introduced. If this is the case, I would strongly advise you to contact your professional insurers as that would appear to be good grounds for a negligence claim to be brought against you.

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By spayne
27th Jul 2010 09:19

Debt swap to company

Hi Stepurhan

 

I have sent you a PM

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