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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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?
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.
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.
Connected
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.