I'm trying to work out the best way to deal with this.
A third party (my client) has loaned a property investment company a substantial sum of money. Said third party is Muslim, and cannot receive interest on the loan.
The company have bought and sold a property, and client's share of profits from the sale is £40k. This has been reinvested on the company's next project.
I'm in two minds about whether or not there is a personal tax effect at this time. Part of me says that there has been a return on investment which is assessable, and that a further loan has been made, and part of me says that there has been no return on the investment yet, and the company is simply recycling it's own profits, meaning nothing assessable.
Ideas?
Replies (9)
Please login or register to join the discussion.
Distribution
I see it a little simpler. I think there's a question to review on the interest side of things (re "interest etc") but I think the Muslim element may be a red herring. E.g. religion aside, what are the terms of the loan? Do they receive repayments? Are those repayments, in their entirety, more than the value of the a amount provided as a loan? If yes, then we have taxable interest or whatever label is chosen to apply to it.
Separate to that, my other consideration would be "has this company actually distributed anything"? If it has not then the tax will only fall on the company's profits.
Does your client actually own some shares, too?
Do you not need to look at taxation of sharia finance (I know nothing)
Once you establish what (in tax law) the party is receiving you can work out if it is say, for tax, to be treated as interest and if it has actually been paid,.
My initial view is if the amount due has been converted into a different " right" then payment has likely taken place. (A bank term deposit matures and interest is credited than the new sum is rolled into a new (lower rate these days) deposit, the non withdrawl from the bank does not negate the tax point)
Edit, added-
http://www.hmrc.gov.uk/manuals/cfmmanual/CFM44000.htm
And what are the accounting entries in the company's books for the £40,000? Has it been credited to an account in your client's name.
Company
I'm not sure that I do at present. I assume there's no agreement (which would sort all this out) and that its a straight loan to a UK incorporated company (not a part in an LLP or quasi-partnership or anything).
That would mean, should company go bust, your client would become part of the (presumably) unsecured creditors and potentially receive nothing if this current £40k is reinvested and becomes diddly squat following a bad investment.
For me, I can't get past the principle that if it ain't left the company then it ain't taxable on your client.
Edit - Or as john says been "earmarked" in books (e.g. div to DLA)
Signals
I'm not sure that I do at present. I assume there's no agreement (which would sort all this out) and that its a straight loan to a UK incorporated company (not a part in an LLP or quasi-partnership or anything).
That would mean, should company go bust, your client would become part of the (presumably) unsecured creditors and potentially receive nothing if this current £40k is reinvested and becomes diddly squat following a bad investment.
For me, I can't get past the principle that if it ain't left the company then it ain't taxable on your client.
Edit - Or as john says been "earmarked" in books (e.g. div to DLA)
Why is the company's perimeter the tax point?
I had some funds in a peer to peer network, I had a portfolio of loans, yet my tax point was the interest earned not whether I withdrew the funds, similar to my online share account where I need to report dividends/gains etc notwithstanding I withdraw nothing.
There has to be more to the analysis than the physical transfer of funds, I think a change in composition of investment (rights) signals at least a partial disposal and acquisition of something.
Apologies
I'm not sure that I do at present. I assume there's no agreement (which would sort all this out) and that its a straight loan to a UK incorporated company (not a part in an LLP or quasi-partnership or anything).
That would mean, should company go bust, your client would become part of the (presumably) unsecured creditors and potentially receive nothing if this current £40k is reinvested and becomes diddly squat following a bad investment.
For me, I can't get past the principle that if it ain't left the company then it ain't taxable on your client.
Edit - Or as john says been "earmarked" in books (e.g. div to DLA)
Why is the company's perimeter the tax point?
I had some funds in a peer to peer network, I had a portfolio of loans, yet my tax point was the interest earned not whether I withdrew the funds, similar to my online share account where I need to report dividends/gains etc notwithstanding I withdraw nothing.
There has to be more to the analysis than the physical transfer of funds, I think a change in composition of investment (rights) signals at least a partial disposal and acquisition of something.
I think we're in agreement (as per my edit re John's comments). Poor use of terminology on my part.
In your scenario you'll have had interest etc credited to your account/received statements/etc no doubt which is as John is saying.
Anything is possible
I've spoken to the guy doing the company accounts, and apparently records are poor. It doesn't look as though there's a formal loan agreement, and is more of a friends handshake deal.
Now, whilst I know the principle that a contract can be written, verbal or implied, I'm certain that where all parties agree it would be difficult to dispute the terms of a verbal or implied contract. On that basis, if the client and the company agree that there is no contractual right to anything other than repayment of the capital loaned to the company, and if nothing has actually left the company's coffers yet (I've confirmed that there have been no repayments on the loan), at this point in time there is no income for my client to report.
Of course, this is dependent upon the explanation of any understanding held by my client and the company, which I'll clarify. Based on conversation with the company's accountant, I suspect that this is where we will end up, though.
"The company have bought and sold a property, and client's share of profits from the sale is £40k. This has been reinvested on the company's next project."
I am sure the parties can now agree that what was envisaged is merely a loan with no rights to anything but some future repayment but that does seem slightly at odds with the initial "right" to £40,000 which I envisage was originally on top of repayment of the loan, however if he is happy to waive whatever rights (indeterminate) he did have fair enough.