Directors introducing cash into their ltd co

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A client has tranferred £300k into their dormant limited company and the money is receiving interest.  The company is not trading, although it does have £1,000 costs each year.  Can you help by pointing me to the guidance on this, it would appear the director might be investing personal funds into his company to save income tax?  Thanks 

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David Winch
By David Winch
23rd May 2024 10:38

It seems to me that this company cannot (now) be described as dormant.
If the company is your client, or if the individual is your client, you need to consider the AML aspects of this (i.e. is there a legitimate source of the £300k).
David
P.S. Others will be better placed to comment on the tax implications.

Thanks (2)
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By David Ex
23rd May 2024 10:41

Patrick UK wrote:

… it would appear the director might be investing personal funds into his company to save income tax? 

Rather than guess, it’s probably worth asking the client why they have transferred £300,000 into their company.

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By Paul Crowley
23rd May 2024 10:50

The company is not dormant for either Co House or Corporation tax.
Where did the money come from? That is your job to find out. If you cannot confirm that it is clean money then SAR
What tax would he be saving?

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Replying to Paul Crowley:
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By Latinaid
29th May 2024 09:39

Paul Crowley wrote:

The company is not dormant for either Co House or Corporation tax.
Where did the money come from? That is your job to find out. If you cannot confirm that it is clean money then SAR
What tax would he be saving?

I guess if that £300k was in a personal savings account, the client would be receiving over £1k interest and therefore would pay tax on it?

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By nrw2
23rd May 2024 11:02

A director / shareholder / anyone is perfectly entitled to lend money to a company which then earns interest on the cash (and pays any corporation tax falling due on the profits)!

Taking cash out of any personal interest-bearing deposit account may 'save income tax' (eg investing it in shares), but this doesn't make it wrong :).

[ The OP question does not relate to AML etc... ]

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Replying to nrw2:
David Winch
By David Winch
23rd May 2024 11:18

I presume the OP is looking for advice around the tax implications of a close company which is investing monies but not trading. But tax is not my best area so I'm leaving that to others.
David

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Replying to nrw2:
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By Paul Crowley
23rd May 2024 11:38

£300K swilling around?
I would definitely have my AML hat on, because what the client has done looks stupid.
He is not looking to maximise the income. There would normally be a reason for this.
If it was just to reduce income, then it could be put into an ordinary current account.
I would be asking the client why he is doing it and consider if the answer rings true. But only after I had convinced myself about where the money came from.

Thanks (4)
DougScott
By Dougscott
23rd May 2024 11:38

Individual receives £300,000 and puts it straight into a company and charges company 6% interest = £18,000 per year income for him. If this is his only source of income then he can earn £18,570 tax free so no income tax to pay.

Company earns say 4% interest or £12,000 per year so makes a loss every year so no CT to pay. It will have to pay CT61 tax on payments of loan interest to director but director can recover that.

Does that work?

(I actually have a client who does more-or-less this except his loan was invested in the limited company's buy-to-let properties which one day will generate a taxable profit for the company, despite the hefty loan repayment interest)

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By Patrick UK
23rd May 2024 14:19

Thanks for the replies. The director has moved the money from personal funds (AML checks carried out) and the money is sitting in the company bank account for a future buy to let property investment. The money is earning interest and the company will pay CT and the director will avoid paying income tax on the funds, had he held these perosonally.

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Replying to Patrick UK:
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By FactChecker
23rd May 2024 15:43

"The director has moved the money .." ... a transaction previously described as 'transferred' and as 'invested'.

So what actually IS the the basis of the transaction? Gift/loan/investment/or what?
This will likely have a major impact on whether or not various objectives are met, and of course on the tax treatment (for individual and for company).

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Replying to Patrick UK:
Stepurhan
By stepurhan
23rd May 2024 15:45

I think your confusion arises from a peculiar phrase you keep on using.

As a general rule, people don't pay income tax on holding money. If the director just had the money sitting in a personal bank account instead of in the company, he wouldn't pay tax on that. He would pay income tax if that account paid interest based on the balance held, but only on that interest amount.

If the money is in the company, then any interest the company earns is not his. He cannot just take it out. Getting the interest out on top of the investment is likely to be taxable. He could charge the company interest and would be taxed on that. He could take the money out as dividends from the interest after corporation tax, but the combined corporation and personal tax is unlikely to make that worthwhile.

If that doesn't clear it up, perhaps you could explain what tax advantage you think they are getting.

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Replying to Patrick UK:
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By paul.benny
23rd May 2024 17:33

Patrick UK wrote:
... the money is sitting in the company bank account for a future buy to let property investment...

It's rarely a good idea to hold BTL properties in a limited company. The income and capital gains are taxable in the company and taxable again when extracted.

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Replying to paul.benny:
paddle steamer
By DJKL
29th May 2024 10:45

Especially as CT rates re chargeable gains within companies are potentially fast approaching the max CGT rates suffered by individuals on residential property(though perhaps that will change post election)

I certainly would not be buying more residential properties within companies as once in them they can be expensive to remove, I would not commit until I viewed the upcoming political landscape more clearly.

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Ivor Windybottom
By Ivor Windybottom
29th May 2024 09:27

Are you worried about the CIHC rules - see CTM60700?

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By birdman
29th May 2024 09:37

On the AML point, wouldn't it be nice to have a system whereby the BANK was responsible for conducting due diligence on the source of the funds, only accepting same when satisfied, and we, as mere onlookers to the transaction, could rely upon their expertise without the need to reinvent the wheel?

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Replying to birdman:
paddle steamer
By DJKL
29th May 2024 10:51

Presume you want banks to actually move the funds rather than block everything- when I sold our house in Sweden I talked to our bank beforehand, sent them details of the property sale etc (albeit legal docs were in Swedish but settlement docs had the figures which were fairly clear) All that happened was that when trying to use these funds to repay the balance of our mortgage things were still fraught with difficulties as the funds became locked up for days until they finally relented and let me use my own money. (grief did not stop there, because we had bought our house pre land registry to discharge the old security on same we then had to faff around doing a voluntary first registration)

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By TomCurtisDTS
29th May 2024 14:08

'Trading includes buying, selling, renting property, advertising, employing someone or getting interest'

'Dormant companies cannot spend or receive any money, otherwise they become active for Corporation Tax. '

The client is not dormant for Corporation Tax purposes and should be completing Corporation Tax Returns and paying Corporation Tax on the interest earned.

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