Loan to a related company

Loan to a related company

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Our client runs a successful trading company which has built up a reasonable amount of cash reserves. The director wants to buy some houses for residential investment purposes but I have advised against buying them in the company because this could affect any future claim for entrepreneurs relief. There is also the issue and risk if anything happened to the company it could also affect his residential investment. I encouraged him to withdraw the money personally and pay the tax.       As an alternative I said it may be possible to lend 'new co' funds from the trading company and purchase the investment property in the new company.  This would need to be disclosed as a related party transactions in both accounts and possibly interest paid on the loan but is this likely to affect the entrepreneurs relief or have any other detrimental consequences like S419 ?
 
 

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By johngroganjga
16th Sep 2014 18:19

S455

If you mean S455 the simple answer is No.

A loan by one company to the other, assuming he is a participator in both of them, is not caught by S455. Of course, any loan by either of them to him would be.

 

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By Portia Nina Levin
17th Sep 2014 11:32

I am not sure

That a loan from company A to company B, so that company B can buy property is any less of a non-trading activity than direct investment in property.

So, yes, I think there is the potential for ER to be just as affected.

I agree with John that there are no section 455 considerations with an intercompany loan.

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By johngroganjga
17th Sep 2014 11:55

On the ER point, it seems to me that making a loan is more like holding cash than investing in property.  If the holding of cash (presumably accumulated undistributed trading profits) doesn't offend for ER purposes I am not sure why lending it out would.

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By Peter613
17th Sep 2014 12:09

Interest

I accept the S455 is unlikely to be a problem.

But why would interest need to be charged on the loan ? We all have clients with Interco loans to related companies where there is no interest charged. And if there is no interest the company's  profit cannot be tainted by non trading income so as to affect ER. Even if interest was charged its likely to be less than the rent (because there is less risk) so again less potential to taint.

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By johngroganjga
17th Sep 2014 12:22

Who said interest had to be charged?  Not me.  Not Portia.

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By Peter613
17th Sep 2014 12:31

No one

but HMRc may

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By Portia Nina Levin
17th Sep 2014 12:32

John

I think it was the OP that suggested charging interest. The question of whether an activity is substantial is not solely dependent on income though. HMRC will also look at assets.

We do not know that ER is not tainted by the holding of excess cash. HMRC once used to say that holding cash could be a non-trading activity. They have stopped saying it, but that does not mean they have stopped thinking it.

I agree that an intercompany loan like this is in much the same boat as cash.

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By johngroganjga
17th Sep 2014 12:33

Why do you think that?  As

Why do you think that?  As you say, "we all have clients with Interco loans to related companies where there is no interest charged".

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By TerryD
17th Sep 2014 12:37

If the loan is repayable other than on demand, then when FRS102 and FRSSE (2015) kicks in, interest will have to be charged/credited through the accounts (but not necessarily paid, of course) as these instruments will have to be stated at fair value. I've no idea how this might affect tax.

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Replying to davidwinch:
By johngroganjga
17th Sep 2014 12:43

Accounting adjustment

TerryD wrote:

If the loan is repayable other than on demand, then when FRS102 and FRSSE (2015) kicks in, interest will have to be charged/credited through the accounts (but not necessarily paid, of course) as these instruments will have to be stated at fair value. I've no idea how this might affect tax.

Agreed - but those are accounting adjustments - which are of course tax neutral over the life of the loan.  Nothing to do with HMRC.

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By User deleted
17th Sep 2014 12:38

Holding company owns both trader and newco.

Divis to Holdings tax free

Holdings does the lending

Trader does not hold any assets (loan receivables etc) that could be seen as non trading

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By Peter613
17th Sep 2014 12:42

why bother with Holding co ?

Newco could own trading companies shares ?

 

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By Exector
17th Sep 2014 13:50

ER and suggested group structures

In order for the shares in any holding co to qualify for ER, it must be the holding co of a trading group. If the (or one of the) subs was the property investment company, then the assessment of whether there was a substantial (>20% by a no of different possible measure per HMRC commentary) non trading element would be carried out at group level, so eg if > 20% of value of gross group assets were represented by the investment properties in the subsid, the qualifying condition would not then  be met. 

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