Trade Co is owned 100% by Mrs A.
Development Co is owned 50% by Mrs A and 50% by Mrs B (Mrs A’s sister in law).
Trade Co loaned £200,000 to Development Co – interest free. Development Co used this to purchase and develop a property which will be sold in due course.
Trade Co is at risk of being sued for a significant amount and Mrs A is looking at ways of reducing the value of this company. One thing she has done is forgiven the loan to Development Co so that those funds don’t come back to Trade Co.
I’m satisfied with how we will treat this for corporation tax purposes. We will also highlight the risk of deliberately reducing the value of Trade Co.
What I am unsure about is whether the write off creates any tax implications for Mrs A. Can this be deemed to be a distribution?
She is using her position as director of Trade Co, to permanently transfer assets (by lending cash then forgiving the loan) to another company she has an interest in.
The original intention was always that the loan would be repaid, but with the potential case against Trade Co, this intention has changed.
No funds will leave Development Co for a significant period of time. The property is still a long way off completion. TiS could be in play if Development Co is eventually wound up, but tax hasn’t been a driver for this so I am comfortable we could bat any challenge away.
I’ve got a niggling feeling in my stomach that she has triggered something here but not certain what? Maybe I just have gas…