ESC C16 and director loan

ESC C16 and director loan

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Company is owned 50/50 between husband and wife and has ceased trading with money taken out as director ( husband ) loan, leaving only debtor for director loan matched by £2 share capital and retained profits. If ESC C16 is granted, does the distribution under ESC C16 get credited to the director's loan account before the company is then struck off ? Director ( husband) is only entitled to 50% of the distribution. Can the wife agree to gift her 50% share of the distribution to her husband to credit his loan account so as to clear it ? How should this be documented ? Any issues foreseen with HMRC as presumably is a common occurrence ?

Will Plumley

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By User deleted
08th Sep 2008 12:15

Ebeneezer's first suggestion.......
.....is spot on.

All you need is your friendly bank manager to control the flow of the funds, i.e. set up a personal loan, pay the money into the company bank account one day, and then take it out to repay the personal borrowing the day after. Problem sorted.......

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By AnonymousUser
08th Sep 2008 08:47

Could....
..the husband (i)borrow the money; (ii)pay it into the company; (iii) have the distribution paid almost immediately; (iv) repay the borrowing. Then the borrowing is not outstanding for more than a day or two?

If that is not possible, could the wife's shares be transferred to the husband so that when the original loan is distributed it all goes to him and thereby offsets the full amount he owes to the company, thus eliminating the s421 exposure?

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By User deleted
05th Sep 2008 15:58

Thanks for your replies...
...however, it is not possible for the husband to repay the money to the company.

HMRC manuals CTM 36210 envisages that the director loan debt to the company perhaps could be assigned to other shareholders as part of the distribution to them. However, by distributing to the wife part of a loan owed by the husband to the company, the company may be regarded as having "released" the loan to the husband for the purposes of S421 ICTA 1988. Consequently, the husband could be liable to schedule F higher rate liability in respect of the amount released by the company (even though the loans would now be due from the husband to his wife).

[Collins v Addies CA1992]

CTM 36210 also notes that liability under S421 ICTA may arise on close company loans released.

Is there any solution to this?

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By User deleted
03rd Sep 2008 16:40

Don't worry
I have done a couple of these and the question has not arisen.

Rightly or wrongly I have simply provided a detailed P&L and CT computation for the final period of trading to HMRC with a covering letter to say all liabilities have been paid asking for permission to strike off.

Full accounts were not prepared as the companies were to be struck off and in both cases I received a favourable response from HMRC.

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By AnonymousUser
03rd Sep 2008 16:27

We have seen...
... this confusion before on Any Answers. The money may have been taken out of the company's bank account but that does not mean it has been taken out of the company. All that has actually happened is that the money has been loaned to the director. If the company is now dissolved under the ESC C16 procedure the distribution to the two shareholders will be of the debt owed to the company. They will get entitlement to 50% of the debt each and the wife could then either insist on payment (as most wives do) or (unusually) forgive the the amount owing by the husband.

The legal procedures for doing all this right are not straightforward. Why not make things easy? Have the husband repay the money and then have the company make pre-dissolution capital distributions to both shareholders by company cheque in the normal way.

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