Hi,
Just want confimation really as to whether I am overthinking things or if this is ok.
Basically, I have a client where there are 2 Directors who are also equal shareholders, Director A had an overdrawn DLA of £100k as an example, while Director B was overdrawn by £50k.
Equal dividends were declared of £100K each, which puts Director B in a credit position, which is fine as a Dividend waiver can be done next year if really necessary (although we have said this should not be done frequently and should be avoided where possible)
So Director B has now said that they are in a relationship with Director A, they are not married as far as I am aware, just cohabiting and in a long term relationship and that they would have been happy to split the overdrawn DLA which would have reduced Dividends for Director A and, as equal shareholding’s, also Director B.
Now my question is, is this ok to do? Would HMRC be happy with us splitting an overdrawn DLA between Directors and thereby being able to lower the Dividend amount? I am aware of joint DLA’s for married couples, but am wary of where the client has split the DLA’s themselves, allocated individual costs to the DLA and now that one of them is substantially overdrawn compared to the other, then turn around to say to treat them as a joint account. Am I being too cautious or would you just split the overdrawn DLA and lower the Dividends?
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Replies (7)
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Yes you are over thinking.
If they agree to pool their drawings that is a matter for them and no-one else.
It’s less likely that such a pairing would want to pool their financial resources, but they are as entitled to as anyone else. It’s a free country. Why do you ask?
I have a similar case where the father is well in credit but the son is overdrawn. I have combined the DLA in the accounts but if it were separated on an individual basis it could cause problems. The reason the accounts have been combined is that the business will one day be handed to the son. I am concerned that this could be considered a gift for IHT.
What you expect to happen to the shares in the future is no reason for doing what you have done. If the two balances have been kept separate in the books and you have concealed the overdrawn one by netting it off in creditors you have a problem.
If the balances have been merged in the books (but you only say “in the accounts”) yes there has been a gift by the father to the son of half the difference at the point of the merging.
Why not just leave them separate and have Director B gift £50k of the dividend to clear Director A's loan account?
Still taxable on Director B but saves having to re-allocate loan accounts.
It is because the directors (not the OP) have agreed to pool their resources. It would be wrong for the OP to prepare accounts on the basis of a fiction that they hadn’t.
