Bank Loan write off taxable

Bank Loan write off taxable

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A trading Ltd Co had a bank loan of £60,000.  Bank has written off £40,000 in view that it may not recoup and the £20,000 outstanding is now  repaid.

Is the £40,000 write off a taxable receipt in the hand of the Company. Under trading loan relationship credits it appears so.

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By User deleted
30th Sep 2011 14:30

Yes

Whether a trade loan relationship or a non-trade loan relationship it will, in the first instance, be taxable.

But presumably the company must have been incurring losses for the bank to think that it would not recover the debt?

And presumably the company is still 'alive', ie not in the middle of any form of insolvency proceedings? (I must say that it strikes me as odd that a bank would write off a sum of that size without attempting to take the company and its directors under, but of course we have no information regarding the circumstances).

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By blok
30th Sep 2011 14:33

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I would say that it will be taxable under the non trading loan relationship. The loan may have been for a trading purpose but the write off by the bank will be non trading receipt.

Probably wont matter though.  taxable in any case.

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Replying to petersaxton:
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By User deleted
30th Sep 2011 14:59

Just for the hell of it

blok wrote:

I would say that it will be taxable under the non trading loan relationship. The loan may have been for a trading purpose but the write off by the bank will be non trading receipt.

Probably wont matter though.  taxable in any case.

If the purpose of the loan was, and remained, for trade purposes, then all debits and credits, including the write-off, will be trade items. It is the nature of the underlying loan relationship, not the related debit or credit, that determines the treatment. This could in fact be quite important if there are unused trade losses from earlier periods.

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By Roland195
30th Sep 2011 14:53

Odd

In what way have the bank communicated they are writing off the £40K?

 

 

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By Alice White
07th Oct 2011 08:46

The interesting thing from a tax point of view is the tax treatment of the participator who receives the loan. If the loan is greater than £5,000, they must either pay the company interest at the “official rate” (currently 6.25%), or they are treated as receiving a taxable benefit equivalent to that rate of interest. It is far from easiness of payday loans for example, which are simply repaiy with the mext paycheck. If the loan is written off, the participator is treated as if they had received a dividend of the amount of the loan. This comes with a tax credit, just like a normal dividend from a company, so the effective rate of income tax is either nil if the participator is a basic rate taxpayer, or 25% if he pays income tax at the higher rate of 40%. HMRC sometimes try to argue, if the participator is also a director or employee of the company, that he should be charged to income tax and NIC as if he had been paid a cash bonus of the amount of the loan – it is this that I have been arguing with them about. The reason for their argument is that there is much more tax to pay – income tax at 20% or 40%, plus employer’s and employee’s NIC.

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By blok
07th Oct 2011 09:11

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you have raised a totally different question because the bank will not be a participator in the business.

If there was to be no nic on a loan write off, nearly all OMB would go down the loan write off route as a remuneration strategy.  I think HMRC are correct morally to argue for nic in the example you give, unless the loan can be shown without question to be granted in the capacity as a shareholder or it is genuinely commercial loan which went bad. 

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