DLA in Credit written off - Insolvency

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We’ve got a client who has a previous company that became insolvent before we started working for him. He had lent money to the company to try to keep it afloat, taking out personal loans and credit cards to do so. A large portion of the dividends he is taking from his current company are to service those loans.

I’m aware that writing off the loan made to the company might, in certain circumstances, count as a capital loss for him. But what I’m trying to establish is if there is anything we can do here to get some sort of tax relief, considering the tax he will have to pay on his dividends.

Any ideas?

Replies (14)

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By Hugo Fair
16th Nov 2021 18:34

It's probably me, but I'm confused ...
* OldCo became insolvent - but client had lent money to the company (so OldCo owed money to client).
* "A large portion of the dividends he is taking from his current company (NewCo) are to service those loans".

So why, after NewCo pays Dividends (presumably to client), is client 'servicing the loan' to OldCo?
I must be misunderstanding something fundamental here - but what?

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Replying to Hugo Fair:
By johngroganjga
16th Nov 2021 18:39

I think the OP means that he is still servicing the loans he took out to finance his loan to OldCo.

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By johngroganjga
16th Nov 2021 18:38

There is something you are not explaining here. Why would he want to waive his loan rather than taking his chance with the other unsecured creditors? Is it because there is no prospect of the unsecured creditors receiving anything out of the liquidation in any event? If so, what on earth would be the point of him waiving his loan?

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Danny Kent
By Viciuno
16th Nov 2021 19:14

Could an loan between A and B be established to allow loans to be serviced without declaring dividends to the director?

May cause issues if the old co is paying a director's loan in preference to other creditors though? I've no idea.

May cause further issues though when the old company loan is eventually written off in the new co.

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By Paul Crowley
16th Nov 2021 19:52

As I read it these are personal loans taken out to lend insolvent company money
Waiving is assumed irrelevant, as loan has presumably become worthless on its own.
Any income from a new company is just plain income, client just uses it to pay off personal debt, no different to a personal mortgage.
I cannot see any traction is this

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By ChrisA
16th Nov 2021 20:10

Paul is spot on with the situation. I also can’t see any traction but wondered just in case I am missing something and someone else has come across it before.

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Replying to ChrisA:
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By Catherine Newman
17th Nov 2021 18:06

I think Paul is spot on. The loans are a personal liability and the client has to pay them off somehow.

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By Duggimon
17th Nov 2021 09:46

Is the insolvent company being wound up or is it just an insolvent company?

If no winding up, and if the solvent company has no other shareholders/directors, I would suggest an intercompany loan between them would be a better mechanism, allowing settlement of the outstanding DLA and providing funds to repay the personal loans.

You could get in bother if the solvent company lends to the insolvent one knowing it's being wound up though.

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Replying to Duggimon:
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By Tax Dragon
17th Nov 2021 12:42

Sounds pretty much like a distribution in any event?

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Replying to Tax Dragon:
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By Tax Dragon
17th Nov 2021 12:46

And even if not, straight into s455 or, failing that, s459?

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By Paul Crowley
17th Nov 2021 10:55

Am I missing something?
Assumed the insolvent company owes more than just to the director
Otherwise just kill the second company and operate the first as the dividend type money reverts back to just repaying the directors loan.

Setting up these loan arrangements now would be fraudulent preference if director gets the money and others get nothing
And if the first company had tax losses then why chuck away that significant tax advantage?

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Replying to Paul Crowley:
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By Tax Dragon
17th Nov 2021 11:42

Paul Crowley wrote:

And if the first company had tax losses then why chuck away that significant tax advantage?

Who said it was the same trade?

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Replying to Tax Dragon:
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By Paul Crowley
17th Nov 2021 12:05

Does it matter if no ownership change?

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Replying to Paul Crowley:
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By Tax Dragon
17th Nov 2021 12:43

Yes.

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