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Directors loan treatment on death

Estate ends up as both creditor and debtor but worried about HMRC's view on IHT if we forgive loan

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My father was sole director and sole shareholder of a UK limited company for the pub he ran when he died suddenly a few weeks ago. My brother and I were named executors and beneficiaries of his estate and would like to sell the company. My father had issued a directors loan to the company for some £270k when he initially bought the pub (some 12 years ago) and which has sat on the accounts as a liability ever since.

Given the liability is now to his estate (and by extension then my brother and I) I would imagine no one would want to buy the company with it still on the accounts, so we were planning on appointing ourselves as directors (once we legally can) and then forgiving the debt such that the company is sellable. Our concern though is that HMRC may see this as IHT avoidance as it would write off an asset from his personal estate therefore reducing its taxable value.

The company has little by way of tangible assets and the profits on the accounts show there is no realistic prospect of the loan being paid off as a result of ongoing trading, but given its reputation/brand etc we believe there is some goodwill value to be crystalised for the estate and therefore want to avoid simply winding up the company if we can (although I concede this would be far more straightforward). Given the debt has no chance of being repaid and had it been to a 3rd party we would simply write down the value as part of the estate valuation but again I don't know if we can do that given we are both creditor and debtor.

I feel like we're caught between a rock and a hard place as we can't sell the company with the loan still on the books but equally we don't want to be doing aything to attract the ire of HMRC - does anyone have any advice on our position here?

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By Tax Dragon
13th Apr 2021 14:24

The debt is an asset of the estate at date of death. It's clearly not in the power of the directors (past or future) to forgive the debt in their capacity as directors. That'd be like you lending me a tenner and my saying "don't bother repaying it".

IANAL, but I guess you and your brother could agree to forgive the debt in your capacity as heirs. If so, being a post-death decision, it doesn't stop it being as asset on death, its value potentially liable to IHT. Forgiving the debt has tax consequences - for the company, which is enriched; potentially an IHT ToV for you and your brother, though I'd argue otherwise, based on the facts supplied; a disposal (of an asset) for CGT.

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Replying to Tax Dragon:
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By charlieroperord
13th Apr 2021 14:45

Thanks for replying! Regards the value for IHT purhposes - if this was a listed bond trading at 10p to the pound then we would value it at 10p, not at a pound, so is there not some consideration of the likelyhood of repayment in the valuation of a loan in this case?

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Replying to charlieroperord:
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By Paul Crowley
13th Apr 2021 14:58

If the pub is worth more than £270K the the loan really is payable by the company

Edit
Re below
Pub is leased

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By paul.benny
13th Apr 2021 14:26

There are quite a few misunderstandings in the OP, which illustrates the potential hazards of DIY when there large numbers involved.

A decent accountant will be able to point out when you're going wrong and also help with maximising the amount gained from sale of the pub - which isn't necessarily by selling the company.

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By Paul Crowley
13th Apr 2021 14:42

If the Pub building is owned by the company then buyers would pay more for the building than the company.
The company may have any number of tax and VAT issues.
And as an old pub is the asset, company comes with latent tax liabilities for the increase in value.
DAFT to write off loan
Sell the pub and sort out the tax etc
Then the £270K can come out dividend tax free

As above
get an accountant

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Replying to Paul Crowley:
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By charlieroperord
13th Apr 2021 14:46

Premises leased (whether or not the lease is assignable is another question mark), fixed assets are few (catering equipment which depreciates pretty steeply), inventory low due to lockdown. Quite sizable accumulated losses (don't have immediately to hand but in the 10s of thousands) but had become profitable in last couple of years. Goodwill was booked on original purchase and has been amortising ever since.

Good point RE the Goodwill, especially in this industry. Was thinking though that its good name/reviews/reputation carries some value? Could be being emotional about it though....

Completely agree on the accountant BTW but wanted to try and get my head around the subject a little first. Thanks for your words of advice

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Replying to charlieroperord:
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By paul.benny
13th Apr 2021 15:40

Quote:
Premises leased ...

So when you said in the OP that your late father lent company money to buy a pub, what exactly was the company buying? You need to be clear about that

If the company holds a lease, then the value (positive or negative) is part of the assets of the company. If company is sold, lease goes with it - there may be conditions in lease that affect ability to sell company.

With respect, you seem to be trying to find answers before you've established all the facts.

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Replying to paul.benny:
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By charlieroperord
13th Apr 2021 15:43

The sum paid for the pub was for the lease and the fixed assets. He paid way too much for it I think as the value of those two combined would be well under £270k (I haven't yet found the original accounts showing the goodwill first booked)

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Replying to charlieroperord:
Hallerud at Easter
By DJKL
13th Apr 2021 17:03

Company selling at the levels you are talking sound likely to be a non starter, what buyer wants a company with all its inherited tax liabilities/obligations, who will warrant for these if HMRC investigate events pre purchase etc etc, professional costs will likely outweigh any benefits?

Simple route, find lease, see what it says, company assigns lease, receives proceeds (maybe given what was paid no tax in company), company maybe in part pays back loan to estate, rest of loan if not recoverable gets written off. However care is needed re plant etc in premises etc , vat , CT, so find the documents (or order copies) and talk to solicitor, accountant and agents who sell leasehold pubs.

edit- If pub not reopening advise insurance company it will be sitting empty outwith Covid rules as if you do not tell them and something happens they may refuse to pay out, also work out who in family will be regularly checking premises as they will likely insist on same. Also consider how family can be made directors of company if not already and review all company rental/hire etc contracts to see what is possible, otherwise company will bleed cash whilst the processes grind forward. Staff, if any, are another issue, but you need to be directors to deal with anything.

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By OldParkAcct
13th Apr 2021 18:49

You need to get paid for professional advice... you might want to sell the company, but you will be limiting your market by doing this as most purchasers will just want to buy the assets rather than the shares.

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By The Dullard
13th Apr 2021 21:03

Standard practice on a company sale is for the purchaser to pay (£270K) less for the shares and make a (£270K) loan to the company to enable it to repay the existing debtor. As everybody else has said, DIY is definitely not the way to go.

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Lisa Thomas
By Insolvency Practitioner
14th Apr 2021 12:01

Sorry to hear of your loss. This must be really tough to deal with that on top of the company's affairs.

Is the Company solvent? Assuming it isn't because of the DLA, if your fathers estate wrote off the debt owed to it by the Company, would that make the Company solvent or would it still be insolvent?

Does the Company have accountants that are advising you?

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