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Directors Loan Account write off

Writing off a credit balance

We have a client company consisting of a current director/shareholder and an ex-director/shareholder. Both have credit loan account balances, totalling >£200k, created by dividends voted, in the past, but not drawn.

Both wish to waive/gift/write off their entitlement, leaving both loan accounts at zero. The company's solvency is the primary concern, for both.

 

Question – is this taxable in the hands of the company? If so, is there any way to avoid it, legally, by drawing up deeds of gift etc?

Many thanks

Monty

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17th Jul 2017 12:50

Why don't they just capitalise them - much easier in terms of paperwork and makes your tax question redundant.

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By Ruddles
17th Jul 2017 12:54

I've little doubt that HMRC would argue that the credit is taxable. There is, IMO, a reasonable argument that it should not be.

And I agree with John - capitalising the debt avoids any such argument.

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17th Jul 2017 13:20

Vote number 3 for capitalisation.

Writing the loan off would be like being taxed on the same income twice.

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By Ruddles
to lionofludesch
17th Jul 2017 14:45

Assuming that the release would in fact be taxable.

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17th Jul 2017 13:36

Is capitalisation the optimal route if one of the creditors is a former director/shareholder?

Where will that leave the remaining shareholder - can he buy out his former associate?

SC

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to Sperethiel
17th Jul 2017 14:00

We're given to understand that both parties wish to write off their undrawn dividends so that doesn't appear to be a problem.

But if the existing shareholder wants to buy out the ex-shareholder, they are free to agree a price for the increased shareholding. Which could be less than the nominal value.

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17th Jul 2017 15:11

Thanks, all, for your input thus far.

Capitalisation appears to be a non-starter as the ex-director cannot, (for reasons I won't go into), hold any capital and the incumbent director currently only holds 51% of the shares with a separate, third person, owning the remaining 49%.

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By Ruddles
to unclemonty
17th Jul 2017 15:15

If one individual cannot hold shares of any description, then there is little choice in how his loan is dealt with.

As regards the other, why not create a new class of share with nil rights?

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17th Jul 2017 16:00

Think the write off/gift may be caught by the 4th bullet point here:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim41810

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By Ruddles
to Paul Scholes
17th Jul 2017 16:36

That was initially where I was headed, Paul. However, that - and the cases referred to - discuss the treatment of actual receipts, which cash is provided to aid the business. In this case, apart from improving the look of the balance sheet, the release would provide no immediate benefit to the company's financial position.

One might argue that if the dividends had been paid out, and the cash then gifted back to the company, we'd be in the same position, but with cash actually having been paid to the company. But as the courts have held, just because you could have done something differently, doesn't mean you have to assume that it was.

But I would expect HMRC to argue that releasing a company from an obligation to make a cash payment is equivalent to a receipt of the same (even though it isn't).

So, while I maintain that there is an argument for not taxing it, I wouldn't be particularly optimistic of winning it.

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17th Jul 2017 17:54

Had a similar scenario around a year ago. I spent hours researching loan relationship rules and HMRC weren't able to help.

Eventually, and on the basis that the lender and company were related parties, I treated it as a "tax nothing".

The company had an exceptional income (added back in the computation) with the amount so relieved and the "donor" was not entitled to tax relief.

There was a slight difference inasmuch as the lender was a shareholder (and also incorporated).

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By Ruddles
to thomas34
17th Jul 2017 23:13

More than a slight difference. The connected party rules apply only where both parties are companies.

And in any event, it's unlikely that the loan relationship code would apply at all in this case.

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17th Jul 2017 22:48

Just had a case where a close family member was prepared to gift an unpaid loan to the company to improve profits & finances for purposes of a mortgage application.

As Ruddles describes I had to say that I couldn't guarantee that the gift wouldn't be taxed.

I also had a social enterprise that started a trading activity and so donations, that had previously escaped tax, became taxable as being deemed to help defray trading expenses.

On balance, unless a gift/donation is a complete windfall, from someone/something not aware of the company's circumstances, I'd not be comfortable arguing it as not taxable.

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18th Jul 2017 16:33

Why not capitalise as nil coupon redeemable preference shares ?
Capitalise at say 0.1p nominal for each £1 of debt converted, redeemable at a higher figure. In practice such shares are worthless initially.
If there is a problem with nil coupon preference shares being "ordinary" shares for tax purposes give them a derisory coupon.

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19th Jul 2017 11:02

A further danger, though it may be remote in one sense, is the IHT position, there is clearly a diminution in the estate of the donors as at present they have a right to repayment of the balances, although given the solvency concerns the value of that right may be discounted. However as the beneficiary of the proposed course of action is a company this cannot be a PET and so is a lifetime transfer for IHT purposes. As it is not an interest in a qualifying company, although owed by such an entity, it does not qualify for Business Property Relief. It is suggested that the value is such that there would be no actual liability and so no requirement to complete an IHT100 but this may depend on other aspects of financial planning undertaken in the seven years before the transfer. Perhaps an outright reconstruction into a new company might be a better option?

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19th Jul 2017 11:10

This looks very similar to a query that came into our Virtual Tax Partner helpline. Apologies to the poster if it is not the same one.
If it is then there is actually a substantial backstory with some material factors to this that would need to be taken into account and what's more those who do know the backstory are giving different legal opinions. No doubt I will be slated by the usual trolls for saying this; but IMHO pretty pointless trying to answer a question where the vital the info is missing and the goal posts are changing, and damned high risk in terms of your PI if you want to rely on an answer where you don't provide the full details.

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to Nichola Ross Martin
19th Jul 2017 11:51

I've emailed Nichola privately, re: her comments and I reproduce this below:

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As explained previously both the client and my firm have taken extensive advice on the ‘how we got here’ position and are happy that the only point that needs addressing is the waiving of the loan accounts and the tax treatment thereof. I appreciate that your opinion is that the backstory is material, and does matter, but we can only proceed based on the client’s wishes.

Rest assured that we are happy with the position we find ourselves in, both from a professional and PI perspective. As you know, it’s a game of opinions, and nothing, sadly, ever seems to be straightforward these days.

Additionally, I don’t see the need for your comment on Accountingweb - nobody commenting on the question is in any danger of getting sued by anyone. For your information I posted the question purely to illustrate to my client how difficult answering the question, in its basest form, was. In this respect I think I have succeeded.

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By Ruddles
to Nichola Ross Martin
19th Jul 2017 11:59

Not sure who you mean by "the usual trolls", but I'm in full agreement with you.

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19th Jul 2017 13:26

No offence meant to anyone who has been replying to this post, the comment on trolls was simply down to the fact that it generally seems par for the course that any discussion on here will degenerate into someone leaping in and slagging someone off. That's why I don't visit any more.
It was just having seen the circular nature of the discussion and having had the benefit of already reviewing this with my team I thought I would simply try and save you all a bit a time - for some other queries!

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19th Jul 2017 15:12

The loan release has to be done by waiver/release deed to be taxable in the first place (probably - see Taxation article in link below). The waiver would be taxable in the company if it’s a human lender per HMRC link below and you need to be careful re deferred shares etc. idea per the 2nd link below that requires arm’s length terms.

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm41080

https://books.google.co.uk/books?id=vZWWDQAAQBAJ&pg=PA411&lpg=PA411&dq=C...

See also:

https://www.taxation.co.uk/Articles/2010/02/03/255531/unfinished-business

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By Ruddles
to Justin Bryant
19th Jul 2017 15:28

Justin - you assume that the debt falls within the loan relationship regime. According to the information in the question, that is unlikely to be the case.

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to Ruddles
19th Jul 2017 15:33

Possibly not, although I cannot immediately see why it wouldn't (under the wide deeming rules or otherwise).

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By Ruddles
to Justin Bryant
19th Jul 2017 15:42

OK, then - explain which deeming rule would bring it within the LR code.

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to Ruddles
20th Jul 2017 11:33

I suggest you check this yourself if you are that keen on knowing the answer (which I am not & I have not said you are definitely wrong have I?).

That said, I think you are right and the deeming rules don't apply and this is not a LR (to the extent it relates to unpaid divs) unless formally documented as such.

Perhaps the more interesting question is has income tax been paid on the unpaid divs and if not should it have been (search this site for a long debate on that question)?

[Edit] Also search this forum for voiding divs that have not been declared properly etc.

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