Inter Associate loan write off

Inter Associate loan write off

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I have a client that has two Ltd Companies. Co A has lend £60k to Co B. Co A has now ceased trading and the owners want to shut dissolve the company (Co A).

Co A has no assets or cash, its now a shell company with just this loan in it. Co B is sucessfully trading but could not afford to repay the loan to Co A and the directors do not want to repay it either.

The directors want to write off the loan in Co A accounts and dissolve the company. I feel there may be a tax implication in doing this because if Co B repaid the loan to Co A and Co A was dissolved there may be capital gains on the value of the share (i think).....

Can anyone tell me if my thinking is correct? I my advise was going to be leave the company (Co A) dormant with the loan intact.

Greatly appreciate your views.

Nigel Watts

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By kenmoody
06th Jul 2009 15:18

Company A would need to formally write off the loan to Company B
by deed, otherwise the debt is still legally due even if written off in A's books and if you dissolve the company the Treasury Solicitor may seek to recover the loan.

If the two companies are connected at the time of the write-off (i.e both owned by the same person or persons) the write-off would be neutral so that there would be no relief in Company A but company B would not be taxable on the write-off.

Ken Moody

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By nick farrow
06th Jul 2009 16:34

presumably if Co A had been a trading co ER would be available o
could the loan be assigned to the director/shareholders in Co A on winding up and treated as a capital distribution qualifying for ER?

Nick Farrow

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By kenmoody
07th Jul 2009 12:16

Dunno about that
A creditor can transfer the right to a debt and you could distribute as an in specie distribution so I think it's legally possible to do that and in fact I think the ESC C16 guidance does mention distribution of a debt in specie.

My reservations would that it sounds like a good way of getting money out of a company without paying tax on it as income and could be a transaction in securities. Of course a distribution under ESC C16 is an income distribution in law so all HMRC would have to do is withhold the concession.

The other issue could be what is the debt worth? If less than face value then there could be a capital gain on redemption because a debt is only exempt in the hands of the original creditor. And of course a gain on realising a debt would not qualify for ER, but even so 18% isn't bad, especially with the AE taken into account.

May be worth considering.

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By nick farrow
10th Jul 2009 12:47

Many thanks Ken - if that is you!

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