Preparing the accounts of a family owned company the director has asked that (part) of the credit on his loan account be disclosed as owing to his son.
Two years ago the director (the majority shareholder) injected significant funds to the company. The director tells me that his son could have paid the money into the company bank account but instead paid it into the his father's account for his father to pay into the company account.
There is no documentation to substantiate that the son was making a loan to the company.
My instinct is to resist this on the basis that the son made no such loan, that the director did and so any repayment to the son is a matter for the director and there is no obligation on the company to meet the debt.
Should I reconsider if the director can provide evidence that the son did actually make payment to the father? If so would the timing of that payment be relevant ie. it was around the time that the director made the deposit to the company bank account.
Thanks in advance.
Replies (16)
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The history of the flow of funds does not matter. The father is at liberty to gift the right to receive the sum in question if he wishes to do so.
I would say to client that the transaction will be treated as a gift, and explain the IHT consequences thereof, unless he can show evidence of the original receipt of funds from his son and son's waiver of right to recovery from the father in consideration of being granted right of recovery from the company.
Why not just accept father's assertion?
There doesn't appear to be any evidence that what he is saying is NOT correct - so why not just go with it and (if you wish) put in writing that you have accepted his assertion and that there may be other unknown tax consequences if for any reason his assertions were to turn out to be incorrect.
Alternatively, suggest he pays it to himself and he can then do what he likes with it.
I don't know all the circumstances here.
I don't just accept what clients say without evidence, but equally I don't ask for evidence for every assertion a client makes. It's a matter of where you fall judgement wise in relation to a specific set of circs.
Here he has told you that part of the loan is from his son. You are under no obligation to verify that. Your client is (I suspect) asking for help. Given that the problem can clearly be dealt with one way or another (see all the suggestions above) I would want to be offering constructive advice to ensure there aren't any material issues arising - rather than challenging (and possibly alienating) him.
But you know your client best.
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Hi Andy
If there were doubts over the lender of the funds, should this have been identified at the time of the loan? The related party note would have dealt with this and the director(s) signed off on this on this basis.
Your concern is that the loan is not wholly from the father in the first place, as it may have originated from the son. Therefore, surely the risk is less because the son is not being gifted that part which belonged to him.
As far as I am aware novation of a debt is legal so long as all parties agree. A debt is not subject to CGT.
If the reason for the gift is IHT planning, then surely a minute of understanding between the parties would suffice.
As an aside, the PET being made will be valued at its recoverable amount.
Is the reason for the gift to enable the son to draw down from company ad hoc, as opposed to declare salary?
Option (c) is the correct course, with the additional step that you need the son's written agreement that he is content to become a creditor of the company in return for relinquishing his rights as creditor of his father. And of course disclaim any responsibility for advising the son to go down that route, which is unlikely to be in his interest!
PS The point is, you don't want to get sued if the company goes bust and the son loses his money.
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Ok- so it isnt a gift, it is a correction of a previous misunderstanding as to source of funds.
Did you audit the source of the funds when you did the accounts in the year the loan or advance was made?
Is your obligation limited to getting the company accounts correct, not to provide investment advice to the individuals?
I would treat the money as a loan in the company books and ask the lender(s) to agree amongst themselves who is owed what and let me know (in writing) the outcome for disclosure purposes. What father and son agree between themselves is to a degree their own perogative.