We have a client whose company has accumulated loss through trading of approximately £1 mil. He also has credit balance on the director's loan account of £1 mil. He would like to write off the loan in favour of the company. What would the double entry be? Will he write the credit balance to the P & L or...? Would there be any tax to be paid? Do you know where I can read more about this topic?
Thanks
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Replies (24)
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Why does he want to do this?
There must be a very special reason because normally one would advise that it is unlikely to be in his interest to do what you say he wants to do.
Tax liability
Why does he want to do this?
There must be a very special reason because normally one would advise that it is unlikely to be in his interest to do what you say he wants to do.
And if it risks creating an unnecessary tax liability all the more reason for not doing it - unless there are some very special and unusual factors at work. Are there, and what are they?
Rather than answer a question with a question
The release would be a taxable credit. Whether or not there would be tax to pay will depend.
?
I suppose that I should be flattered. I'd be delighted to have half the knowledge that BKD has - and who helped me on numerous occasions. I guess that I've just allowed my style to follow his - and yours, Portia.
Armed with the knowledge of the consequences, the OP's client can make a decision on whether they really want to write the loan off.
The point is that "Why would you want to do that?" does not answer the question "What are the consequences of jumping off Beachy Head?". If you could ascertain the consequences and report back, I would be most appreciative.
Question
The point is that sometimes people ask the wrong question, or at least ask them in the wrong order.
Faced with a client who says he wants to waive a debt to due from his company the accountant should first advise on the merits of such a step, and especially any pitfalls to be aware of, so that the client can make an informed decision. Once the client has decided the accountant can move on to the implementation.
But the accountant here is in danger of skipping the advice stage and going straight on to the implementation.
So in my opinion the best advice for the OP is to go back to their client to discuss the whys and wherefores, and worry about the implementation at the appropriate time, if there is one.
Jumping off Beachy Head
The consequence of doing this is that you fly through the air quite safely. The danger is in the landing unless for example you are attached to a hang glider and know how to use it. I think it is important to know why you are considering this. Is it something you wish to try yourself? Or are you planning on recommending it to someone else, maybe someone you do not like or someone like me who posts sarcastic comments?
I have the same problem but not on such a grand scale.
When I questioned the client it was 'to make the balance sheet look better for sale of the business' although it turns out he's not selling just brining someone in to help build the online side of the business up!
Cant get him t change his mind! (I'm the director and I can do what I want!)
It is a loan relationship credit for the company.
The only question then is whether it is a trade loan relationship (with the effect that the brought forward losses are available) or a non-trade loan relationship (with the effect that the brought forward losses are not so available).
Taxable
Why not?
Lady C - not necessarily a loan relationship item. We don't know how the debt arose.
Loan a/c
Is the company solvent? Have the accumulated losses only been funded by the director's loan?
Writing off a liability is a taxable profit to the company which may be able to offset against losses b/f. That would need to be carefully studied.
He could claim a loss for CGT in certain circumstances anyway if this is what he wants.
Converting to shares would have to be at market value.
There is no simple answer that can be assured of being the "best advice" without knowing all the facts about the company and the director personally.
Why at market value?
Why would the issue of more shares have to be at market value? Surely the company, if it is a single person company as I have assumed from the OP, just issues £xx more in share capital that the director subscribes for? Instead of paying cash, they are paid for with the credit on his loan account.
Has anyone ever told you peter
Is the company solvent? Have the accumulated losses only been funded by the director's loan?
Writing off a liability is a taxable profit to the company which may be able to offset against losses b/f. That would need to be carefully studied.
He could claim a loss for CGT in certain circumstances anyway if this is what he wants.
Converting to shares would have to be at market value.
There is no simple answer that can be assured of being the "best advice" without knowing all the facts about the company and the director personally.
that you look like mike ashley?
Looks
Is the company solvent? Have the accumulated losses only been funded by the director's loan?
Writing off a liability is a taxable profit to the company which may be able to offset against losses b/f. That would need to be carefully studied.
He could claim a loss for CGT in certain circumstances anyway if this is what he wants.
Converting to shares would have to be at market value.
There is no simple answer that can be assured of being the "best advice" without knowing all the facts about the company and the director personally.
that you look like mike ashley?
He looks nothing like him. Mike Ashley is the ginger bloke with a quiff from the 80's isn't it?
Issue preference shares
If you issue preference shares, redeemable when the company decides (not the shareholder) then it will go into the balance sheet as share capital. Can then be redeemed once profits are made.
Overdrawn DLA - Write off
What if it was the other way around, what if the Director owed 40K+ to his company - could this be written off with closing the company?
Would the O/D DLA be inluded on the P11D then the SA? Or if it's written off with the closure of the company, does that mean it's simply gone?
Many thanks
