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Directors Loan Account to Capital

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I have a client which when i inherited it from another firm which has Land & Buildings of £1.4m and a directors loan account (credit) of £1.7m on the balance sheet.

The company has been purchased by new owners for £2.2m. This was for the shares and business and paid for by the new owners to the old owner directly. However, I am left on the accounts with a directors loan account of £1.7m which no longer exists to the original owner. How do I deal with this? The only answer I could think of is transferring this to reserves. However, I am worried if there are any tax implications if this goes to distributable reserves and if this goes to undistributable reserves what will happen if the company is wound-up/liquidated. 

Or should this stay as a loan due to the new directors?

Never had to deal with this before. Help would be much appreciated

Replies (40)

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Melchett
By thestudyman
15th Jul 2021 17:01

If it was purely a purchase for shares, then balances on the balance sheet remains. The directors loan remains valid until there is a formal release of obligation.

I'm surprised the issue of the loan balances were not resolved during the due diligence stage.

Thanks (6)
Replying to thestudyman:
Psycho
By Wilson Philips
15th Jul 2021 17:13

Difficult to advise without knowing the full details of the deal. In the absence of any meaningful information I agree with the above - if the purchaser simply paid £2.2m for the shares then the loan remains outstanding and due to the former directors. But I suspect that it is not that simple.

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Replying to thestudyman:
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By GrahamJY
15th Jul 2021 17:32

I don't seem able to get hold of any legal agreement from the new owners or the solicitors. The sale took place just a couple of weeks before the initial lockdown.

I am sure the £2.2 m paid was for everything, though in reality the major asset is the building as the business just about posts a small profit.

Thanks for your help. I am still stuck as it seems the legal paperwork will never appear.

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Replying to GrahamJY:
By johngroganjga
15th Jul 2021 18:35

But can the new owners not tell you what the substance of the deal was, and in particular how the loan from the vendor figured in their thinking? Surely they can’t have forgotten whether the company they have bought does or does not have to pay £1.7 million to the vendor?

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Replying to GrahamJY:
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By Bobbo
16th Jul 2021 08:50

GrahamJY wrote:

>

Thanks for your help. I am still stuck as it seems the legal paperwork will never appear.

Why would it never appear? Surely the new owners have a final signed copy of the share transfer agreement that they could very easily scan in the relevant pages of and send to you. Or they will have a draft unsigned version as an attachment to an email somewhere that they could forward to you. Or they could simply spend 5 minutes telling you via phone / email what the agreement says.

This is not difficult stuff. Either it says the 2.2m is 0.5m for the shares and 1.7m to repay the directors loan or it says the 2.2m is purely for the shares.

Thanks (1)
Replying to Bobbo:
Psycho
By Wilson Philips
16th Jul 2021 09:10

Bobbo wrote:
Either it says the 2.2m is 0.5m for the shares and 1.7m to repay the directors loan or it says the 2.2m is purely for the shares.

... or it says something else.
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Replying to thestudyman:
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By RayM55
19th Jul 2021 10:38

Indeed and given the size of the loan it is conceivable the the creditor still controls the company for some tax purposes. There may also be IHT
/CT issues if the loan is released!

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RLI
By lionofludesch
16th Jul 2021 00:00

If you don't get a satisfactory explanation, you cannot finalise the accounts.

£1.7m is material.

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Replying to lionofludesch:
Psycho
By Wilson Philips
16th Jul 2021 09:11

He cannot finalise the personal tax return either - £1.7m is likely to be material.

Thanks (1)
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By GrahamJY
16th Jul 2021 09:16

Many thanks for the replies so far. I don't think I've fully explained the situation enough and have gleaned some more information. The company was originally a social club belonging to a blue chip company. Around 6 years ago the building and business was sold to a private owner. He paid £1.7 million direct to the blue chip company from personal funds. To bring this onto the accounts his accountants did a journal as follows:

Dr Land & Buildings £1.4m
Dr Tangible FA £0.2m
Dr Goodwill £0.1m
Cr Directors Loan Account £1.7m

The director never physically paid the loan to the company.

Now around 6 years later new owners have purchased the company. Everything - land & buildings, assets, shares, goodwill. They have paid £2.2m. I understand that the breakdown was

Land & Buildings £1.9m
Goodwill £0.1m
Assets £0.2m

The directors loan account still shows on the accounts but doesn't exist as such. It was just a book entry to bring the assets onto the accounts when the limited company was set up.

I have considered 3 options:

1. Leaving the loan as it is, but now repayable to the new owners.
2. Transferring the loan to capital. If so should this be distributable (preferable but any tax affects) or non distributable.
3. Effectively reversing the original journal and accumulated depreciation etc and then bringing in the assets at the new value i.e.

Dr Land & Buildings £1.9m
Tangible FA £0.2m
Goodwill £0.1m
Cr Share Premium £2.2m

I think the third option reflects what has happened, but would this be considered the correct treatment.

Apologies, that this is all the information that I have and likely to get.

Thank you

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Replying to GrahamJY:
By johngroganjga
16th Jul 2021 09:34

So the original owner bought land and buildings etc. from a "blue chip" company, then introduced them to the company they presently sit in. His loan results from the second of those two transactions. Why do you say "it doesn't exist as such"? Has it been repaid? Was it agreed to be waived as part of the sale agreement? Was it assigned to the new owners?

Until you know the answers to those questions, as others have said you can't move forward.

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Replying to johngroganjga:
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By GrahamJY
16th Jul 2021 09:42

It was waived as part of the sale agreement.

He never physically made the loan in the first place.

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Replying to GrahamJY:
By johngroganjga
16th Jul 2021 10:54

Why didn’t you say that in the first place? If you are sure it was waived - have you seen the deed of waiver? - then that is what you reflect in the accounts. Job done.

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Replying to GrahamJY:
RLI
By lionofludesch
16th Jul 2021 15:17

GrahamJY wrote:

It was waived as part of the sale agreement.

He never physically made the loan in the first place.

So you have a gain on the shares overstated by £1.7m, a £1.7m loan which may or may not get tax relief and the company has a £1.7m corporation tax credit.

Let's hope that's not the situation at all.

Thanks (0)
Replying to GrahamJY:
RLI
By lionofludesch
16th Jul 2021 15:19

GrahamJY wrote:

It was waived as part of the sale agreement.

He never physically made the loan in the first place.

So you have a gain on the shares overstated by £1.7m, a £1.7m loan which may or may not get tax relief and the company has a £1.7m corporation tax credit.

Let's hope that's not the situation at all.

And I don't know what you mean by "never physically made the loan". He doesn't have to pay bank notes into the company to make a loan.

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Replying to lionofludesch:
Psycho
By Wilson Philips
16th Jul 2021 16:15

I was about to make that same (last) point myself - the director transferred valuable assets to his company with consideration left outstanding ("on loan"). So long as the amount credited to the DLA was a fair reflection of the value of the assets, I can see nothing artificial or "non physical" about the debt. "Loan" is something of a misnomer here.

I can't remember the precise details, but a former client of mine screwed up big time by deciding not to have professional (tax and accounting) input on an SPA (he and wife were buyers). From what I recall it was a fairly standard deal (worth about £10m) with a typical net asset adjuster. However, the way that the agreement was worded there was a double-counting of one or more elements so client ended up paying £0.5m or so more than they should have done. I think they did eventually succeed in suing their solicitors but if there was ever an example of the wisdom of spending £10k or so that was it.

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Replying to GrahamJY:
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By Calculatorboy
19th Jul 2021 16:59

of course he made the loan in the 1st place.. he transferred moneys worth

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Replying to GrahamJY:
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By Calculatorboy
19th Jul 2021 16:55

The more you try to explain, the more it sounds gibberish , do yourself a favour get some proper professional accounting and legal advice

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By GrahamJY
16th Jul 2021 10:25

Many thanks for all your help.

I have been promised a copy of the legal agreement Monday morning, so hopefully that will resolve the issue completely.

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Replying to GrahamJY:
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By Wanderer
16th Jul 2021 16:07

Do, this. I started unpicking your 16th Jul 2021 09:16 post as to what happened but both the description of what happened six years ago and now don't make sense.
You need the agreements to establish exactly what happened then & now (particularly shares v assets) which has become confused.

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By Tax Dragon
16th Jul 2021 11:02

By the sound of it, the company was set up six years ago, the (current) vendor bought the business and building personally and transferred them (at no cost) to the company. His accountant asked on Aweb about how to treat this and was told to put it to DLA - because that's this forum's standard answer. Result: it was shown as a purchase by the company at £1.7m and you have the accounts saying that there's a loan in this amount, when this was never intended.

I don't know how you unpick that. (And I'd be interested in how the legal documentation dealt with it.) But good luck.

Edit: incidentally, the vendor has an issue because he's sold shares for £2.2m that appear to have cost him a quid. In his mind, the cost is £1.7m. Seems to me that the £1.7m should really have been share capital. But again, when the old accountant asked about that on this forum s/he would have been laughed at for suggesting that. I hope the legals do resolve it - one or two possibilities occur as to how they might have done so.

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Replying to Tax Dragon:
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By GrahamJY
16th Jul 2021 11:12

Thank you, I think you've summarised it perfectly.

Latest twist seems to suggest that the purchase is through another organisation and is therefore their asset, so it's looking like a disposal. I will eagerly await the full legal documentation.

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Replying to Tax Dragon:
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By Rgab1947
19th Jul 2021 10:42

I am lost here. If an owner transfers an asset to the company and the company now has proper legal ownership but no payment was made then it does indeed become a loan. Unless gifted but that is another story.

Did the sale 6 years ago give rise to an tax event? Who knows.

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Psycho
By Wilson Philips
16th Jul 2021 11:39

Without seeing the paperwork, my comment is - what a pig's ear.

Vendor is looking at CGT proceeds of £2.2m with virtually no base cost.

Depending on how the company treats the loan (sic) waiver it's possibly facing a £1.7m taxable credit. (Not a problem for the OP or his client, of course.)

Thanks (1)
By SteveHa
16th Jul 2021 13:35

I can't imagine that a transaction of £2.2M would be conducted without an SPA, especially if there's a solicitor involved, and I would expect the SPA to tell you everything that you need to know.

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Replying to SteveHa:
Melchett
By thestudyman
16th Jul 2021 15:01

You only have to look at some threads on ukbusinessforums where people are considering buying or selling a business, but going down the DIY route. Its only going to end up in tears.

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By Bobbo
16th Jul 2021 15:26

Given further input from the OP, I would like to update my earlier comment.

This is not normally difficult stuff, however this scenario has been a complete balls up from the start 6 years ago.

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By More unearned luck
16th Jul 2021 17:42

Is the £1.4m in land and buildings the bare purchase price or is that that price plus SDLT and the other incidental costs of purchase?

It might also be useful to obtain a copy of the contract and completion statement for the purchase of the property/business as some respondents doubt the correctness of the opening journal.

The land registry entry might also shed light on what happed six years ago.

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By ABD
19th Jul 2021 10:29

I would guess this was a "debt free" purchase. The new owner probably paid 1.7m to the company as loan to replace the DLA and only paid 0.5m for the shares!

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By Rgab1947
19th Jul 2021 10:38

Look at the sale agreement. If for shares and loans account ceded then it stays as it is with the new owner of the loan now his property.

If there is no mechanism of the liability having transferred, sale agreement is silent, then the old shareholder still has a claim againts the company. Not a directors loan but an ordinary loan.

So its simple, follow the sale agreement.

As another poster said surprised not sorted at the due diligence stage.

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7om
By Tom 7000
19th Jul 2021 11:04

Sounds to me like there was a mistake of fact in the original paperwork drafted by the solicitors and it should be corrected.

The consideration should have been repayment of loan first then the balance for the purchase of the shares. So purchaser stands in the shoes on the vendors loan account

Otherwise the purchaser still owes the vendor the loan. Or maybe there's no mistake and he does still owe the loan.

You need to ask your client what was the intention, then explain it to the lawyer and see what he says about correcting it, if its possible.

Seen it before...

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Replying to Tom 7000:
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By Arcadia
19th Jul 2021 11:37

The solicitors will not want to do anything which implies they may have made a mistake, even if they haven't. They will block.

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By Arcadia
19th Jul 2021 11:35

If 6 years ago the individual introduced the property into the company (why do that anyway?), was it done via deed? If not then the transfer may not have taken place, and the entries can be reversed by prior period adjustment. Land registry will tell you.

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By Arcadia
19th Jul 2021 12:24

My bet is that the solicitors will have checked on Land Registry as to who holds title and this will be the old owner personally. They will have done a standard property sale contract between individuals. They won't know or care what it says in the company accounts. Any news from OP?

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By David Gordon FCCA
19th Jul 2021 12:31

Sorry
I am confused
If the director's loan account appears on the B/sheet it is real.
It should have been dealt with as part of the transfer proceedings.
If the buyer bought the shares I would capitalise the credit balance on the b/sheet re the loan as a revaluation. It is a real value left in the company.
2)
If the buyer bought the assets and goodwill from the company, then subject to any c.tax arising on the sale of assets the company uses the funds to repay the director's loan. The company is then left as a "shell" which may be struck-off.
This is if I have understood the question.

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By GrahamJY
19th Jul 2021 12:42

Many many thanks for all your input.

The legal agreement was sent over yesterday and it states that the directors loan is paid to the director and replaced by a loan of the same amount due the new owners. The balance of the payment then being for the shares.

For all the complicated scenario's I was being lead to believe, it turns out that it's purely a loan replacement on the accounts,

Thank you again.

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Replying to GrahamJY:
7om
By Tom 7000
19th Jul 2021 12:49

Lucky :)

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Replying to Tom 7000:
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By Hugo Fair
19th Jul 2021 13:01

Who? OP or OP's client?!?

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By North East Accountant
19th Jul 2021 14:03

It goes to show that you can't beat a nice clear audit trail with full board minutes and ideally all monies flowing in and out the company bank account (or via solicitor client account).

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By Leywood
19th Jul 2021 18:38

Hopefully more folk will learn to ask for documentation rather than just making assumptions. Lets face it, clients will just make things up sometimes to get you off their backs.

There are times when you also have to say that you cannot do your job unless the full paperwork is supplied, down tools until they hand it over and failing that be prepared to dis-engage.

Would save lots of guessing games on here as well.

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