Inter-company loan write off

Inter-company loan write off

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Company A (husband sole shareholder and director) gives interest free loan of £50,000 to Company B (wife sole shareholder and director) for working capital. Company B pays back £20,000 after few months and then faces a difficult trading period and goes into liquidation. Company A writes off the balance £30,000 loan as Company B had no assets when it went to liquidation. 

Is the £30,000 loan write off tax allowable in Company A?

Many thanks in advance for your valuable comments.

Replies (3)

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By eastangliantaxadvisor
11th Feb 2013 08:49

First, we need to consider if these companies are connected under the loan relationship rules. I can see nothing in the law that would make these connected, (unlike associated it refers to person) and therefore the normal loan realtionship rules would apply.

 

Is it a trading loan - I would assume that it was not in the ordinary course of the trade.

 

Therefore:-

 

a. Company A will recgonise the loan as a debit, and get offset against the as a non trading deficit.

 

This will be as follows:-

However, relief is given as follows for all or part of the deficit:

(a) by claim in a group relief claim  or(b) by claim:(i) set against other profits of the company for the deficit period, in whole or in part  or(ii) carried back and set against the chargeable loan relationship profits of the previous 12 months, in whole or in part (); or(c) any remaining amount will be carried forward and set against non-trading profits in succeeding accounting periods

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By fh2956
11th Feb 2013 19:13

Participator

My take on this is different:

An associate (wife) of a participator of a close company is also linked to the participator. The rights and powers of the wife are linked to the participator under close company rules. The loan made to a company owned by the wife is effectively treated as loan made to the participator (husband) by the husband's company for tax purposes, subject to 25% penalty tax and write off is treated as distribution and not allowed for deduction purposes.

 

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By Scion
22nd Feb 2013 13:50

Is it a loan for loan relationship rules ?

 

Just because parties call something a loan does not mean it is a loan for loan relationship purposes. See MJP Media tax case.

Assuming it is a loan then you need to consider if it was made for an unallowable purpose. What was the commercial benefit to Husband's company in making such a loan? If none then may not get relief under LR.

If made for allowable business purpose then you need to consider if connected companies which would deny relief (with control defined at s472 CTA2009). However the appointment of a liquidator should break any control if there had been.

Whilst s455 can catch indirect loans via othet companies or reciprocal arrangements, if the loan was not made with the purpose of then extracting via the wife's company ( where s455 may apply in wife's company in any event) then I don't think it will be a loan to a participator.

Therefore if you can support the loan was for an allowable business purpose of the husband's company then there may be a LR non trading deficit as noted above. If not then may be a simple non business debt that falls under CGT with no relief to the original lender.

 

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