Can the company borrow money to pay a dividend?

Can the company borrow money to pay a dividend?

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My client wants to buy an investment property through a newly formed company but can't get the loan. He decided to borrow the money through his trading company in order to pay a divi to the directors (plenty of distributable profits) who will then lend the money to the investment company to buy the property. Could anybody see any problems with this? I would be most grateful for your comments.

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By johngroganjga
22nd Apr 2014 13:09

No doubt you have considered how much of the dividend payments will be lost in tax, and so not be available to lend to the investment company.

If tax is a problem, why can the trading company not just lend to the investment company? 

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Replying to carnmores:
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By MGD
22nd Apr 2014 13:21

Yes we have considered the dividend tax. Can the trading company ( car repairs) lend the investment co which is a connected co without any tax consequences? Also if lending is not part of the company's activities, will lending to the investment company not cause any problems?

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By johngroganjga
22nd Apr 2014 13:29

There will be no tax consequences of the loan if it is applied in purchasing property, as you say it will be.

If the objects of the trading company do not permit lending the shareholders should change them if they want it to do so.

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By MGD
22nd Apr 2014 13:34

Thanks a lot for this. Much appreciated.

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By User deleted
22nd Apr 2014 14:36

Just thinking ...

... have you looked at debt factoring, may be cheaper as the balance could fully fluctuate with cash flow and thus minimise interest, you would have to weigh that up against service charges though. It also gives you a line of credit save having to arrange another loan later if they want to do the same again.

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Replying to andy.partridge:
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By MGD
22nd Apr 2014 15:08

They don't have any debtors, almost cash based business. Going back to your earlier point, could the trading company lend to a connected individual without tax consequences assuming objects permit?

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Replying to lionofludesch:
By johngroganjga
22nd Apr 2014 15:20

Connected

MGD wrote:

They don't have any debtors, almost cash based business. Going back to your earlier point, could the trading company lend to a connected individual without tax consequences assuming objects permit?

It depends how the individual and the company are "connected".  If the company is a close company and the individual is a participator in it the loan will be caught by s455.

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Replying to andy.partridge:
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By MGD
22nd Apr 2014 15:10

Forgot to say that the loan to the connected individual would also be for the purchase of an investment property

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By User deleted
22nd Apr 2014 15:21

Oh dear ...

... hope your MLR procedures are robust.

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By MGD
22nd Apr 2014 15:45

Thought so. Thanks a lot.

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