Loan write offs

Loan write offs

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My client owns a trading company and a property investment company (both 100%) and both have net asset values of approximately £100k. My client wishes to issue shares in the trading company to a senior employee in order to tie him into the company, but he does not want the employee to have any rights over the existing net asset value of the company, but only in the future trading profits.

I suppose this could be effected by issuing "B" shares etc, but it would be far simpler for the trading company to loan £100k in cash to the property company, and then to write off this debt. This would effectively wipe out the reserves of the trading company so that when shares are issued to the employee, he only participates in future profits.

This doesn't appear to fall within the value shifting legislation of s29(2) TCGA, as the companies are connected, the loan write off should be tax neutral, the trading company is not actually "trading" for taper relief purposes, so we do not seem to be creating an exit problem.

Is anybody aware of any nasty pitfalls?
Richard Meller

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