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Directors Loan to Company to be paid back to kids

I have loaned my company money and requested that it be paid back to my children

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I have loaned my company money and in the loan agreement I have requested that the loan be paid back to my children.

I have two questions

1. From an IHT perspective is the Potentially Exempt Transfer date, the date that I loaned the company money or the date that the children will receive the money

2. Can the children receive the money tax free, as i would if the money was paid back to myself as director.

Any help is appreciated.

 

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12th Mar 2019 15:22

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12th Mar 2019 15:26

I'm not an IHT expert but my understanding is that the date of transfer would be the date that you effectively assigned the debt to the children.

There should be no further tax consequences arising on repayment to your children.

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to Wilson Philips
12th Mar 2019 16:19

Quote:

There should be no further tax consequences arising on repayment to your children.

Big statement. Almost certainly wrong.

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to Tax Dragon
12th Mar 2019 16:47

Can you elaborate? If a debt is assigned to someone else, with all the tax implications which that assignation might entail, what tax issues might arise on the subsequent repayment of the debt?

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to Wilson Philips
12th Mar 2019 17:15

What are the terms of the debt being assigned?

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to Tax Dragon
12th Mar 2019 17:21

OK I take your point. I was making a very broad assumption (a guess if you will!) that the debt had simply been assigned to the children without any condition or encumbrance.

"I don't want the money, my children can have it."

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to Wilson Philips
13th Mar 2019 06:43

But there is an encumbrance - or at least there should be, if the OP doesn't want to create other issues. At a guess (which fits better with what we have been told - or, rather, with what the question was... we've not been told anywhere near enough to make any of this supposition relevant to the OP - than your various guesses), the OP wants to put a period of years between the gift and the repayment.

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to Tax Dragon
13th Mar 2019 13:24

What other issues?

In any event, you haven't explained what income tax or capital gains tax issues might arise on repayment of the debt, encumbered or otherwise.

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to Tax Dragon
12th Mar 2019 18:03

the

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to Mohammed Razzaq
13th Mar 2019 06:57

Quote:

the

....longer the period of years, the bigger the tax risks and the higher the chances of HMRC spotting the issues.

....planning sounds easy to self-execute (and I have seen DIY versions). The incentive for DIY is that professionals charge high fees for this kind of work.

...reason for the high fees is that there is some heavyweight technical analysis that is done in every case so that documents can be tailored appropriately. DIY won't do that, increasing the tax risks.

(I confess to having made some guesses, but you can tell me if I'm wrong.)

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to Wilson Philips
12th Mar 2019 17:20

Ok, I normally avoid doing this on anonymous threads (especially with bog-all info), but in general you would need to consider income tax and CGT on the repayment.

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to Tax Dragon
12th Mar 2019 17:33

Why would income tax and/or CGT apply on simple repayment of a debt?

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to Wilson Philips
13th Mar 2019 06:59

Because, by the time the debt is repaid, the encumbrance(s) will no longer exist.

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to Tax Dragon
13th Mar 2019 13:12

What encumbrance(s)?

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to Wilson Philips
13th Mar 2019 13:44

I have a non-interest bearing debenture for £100,000 in Tame Your Tax Dragon 3 Ltd, redeemable in 2029.

TYTD3L is a roaring success, but my separate tax advisory business is, understandably, not doing very well currently. I could do with some readies.

How much will you pay me for my debenture?

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to Tax Dragon
13th Mar 2019 14:06

Thank you - the penny drops, and I retract my earlier statement!

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to Wilson Philips
13th Mar 2019 14:10

This is in essence the same discussion I am having with atlea below. Why don't the children, given this "plain vanilla loan", convert it immediately to plain vanilla cash?

If that's the intention, then the OP should simply call in the debt himself and hand the cash over - no tax, job done. It's clear from the question though that this is not the intention. To achieve the intention requires either that that it's not a "plain vanilla loan", or that the gift is possibly not properly made (therefore possibly not made at all).

(Caveat: I don't actually know what you meant by "plain vanilla loan" so there is some additional guesswork in this response.)

Edit: In view of your edit, I was going to delete this too... but I'll leave it here for atlea.

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to Wilson Philips
13th Mar 2019 14:22

Wilson Philips wrote:

Thank you - the penny drops, and I retract my earlier statement!

For clarity, that'd be the one that read:

Wilson Philips wrote:

There should be no further tax consequences arising on repayment to your children.

?

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to Tax Dragon
13th Mar 2019 14:36

That's the one!

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12th Mar 2019 16:40

If I were you, I'd have found out the answers to both of those questions before setting the arrangement up. You could then have ensured the detail of the arrangement (which you haven't shared, meaning any answer would be partially guesswork) achieved your desired aims.

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to stepurhan
13th Mar 2019 07:04

Well said. And I note "partially" includes "wholly or mainly", which phrase you could have used without any dissent from me.

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12th Mar 2019 16:49

I don’t think you can assign an uncertain debt to a minor since the debt is part of a contract and minors cannot enter into contracts. A debt owed by a limited company is an uncertain debt. So in reality the debt is still owed to the adult until the minor affirms it at 18.

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By Dib
to Tim Vane
12th Mar 2019 16:55

Er...

..Yes, they can. General contract law provides that a minor can enter any contract, however, the contract would be voidable at any time by the minor (prior to reaching the age of 18 and a grace period thereafter).

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to Tim Vane
12th Mar 2019 16:56

I'm not up to speed on the legalities (so I'm not disputing your point) but where does the questioner say that the children are minors? (A reasonable assumption, I suppose, but it needs to be confirmed.)

Presumably, though, if the above applies then the date of transfer for IHT purposes becomes the date that the child receives the money?

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12th Mar 2019 17:28

Prob should’ve gifted the money to your kids they had them lend it to to co.

What did the accountant or lawyer that you engaged at the time say?

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to atleastisoundknowledgable...
13th Mar 2019 07:09

That raises other issues. Thinking about those will help explain some of my comments above.

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to Tax Dragon
13th Mar 2019 08:14

Quote:

That raises other issues.

Like what (not said in an ar5ey manner, but in a learning manner)?

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to atleastisoundknowledgable...
13th Mar 2019 13:08

Well there are non-tax issues, such as: why and on what terms is the offspring making the loan? The non-tax issues can give rise to tax ones... although you are right that CGT is no longer among them, so that's one less thing to worry about!

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13th Mar 2019 16:29

@ Anonymous (OP).

The Loan Agreement could have various taxation consequences (including the IHT factor to which your opening question alludes).

Without knowing the PRECISE wording of that Loan Agreement, one can only speculate (to NO useful effect, I regret) as to those consequences.

May I thus ask whether the Loan Agreement was prepared by a lawyer. If so, your enquiries are certainly best answered by that lawyer. If however the Agreement was NOT prepared by a lawyer, then you should contact a lawyer and ask them to:-

(1) Review that Agreement with a view to improving its wording, to ensure that it is not open to misinterpretation, and

(2) Advise you of ALL the taxation consequences thereof (with a view to amending the terms therein, if not fully tax-efficient to all parties).

Basil.

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to fawltybasil2575
13th Mar 2019 23:41

I agree every word.

OP, if this is a transaction in the planning, don't DIY it. If it's too late, do as Basil suggests.

You may have come perilously close to giving your company money on trust for your children. Not only would that change the tax analysis from day 1, but you might find the legal position is not what you thought it was. (Your company's accounts could also be wrong.)

The consequences are too serious to stay ignorant about - take advice.

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