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Do we have a tax problem?

Director using company funds to fund other business interests

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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…

Replies (9)

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By Accountant A
25th Sep 2019 12:18

Is any of this discussion relevant:

https://www.accountingweb.co.uk/any-answers/is-there-a-tax-liability-if-... ?

Has the client taken legal advice about the proposal? No idea what the position is if a company being sued proactively seeks to divest assets at non-arms length terms. If it doesn't work legally, there would be no point in doing it.

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Hallerud at Easter
By DJKL
25th Sep 2019 12:32

The only thing I can spot is the future latent IHT disadvantage of transfer of value from trade company (shares maybe likely eligible for BPR) to devco (shares possibly not eligible for BPR)

The question is certainly above my pay grade ( I do not know what I do not know) but to me the fact that funds remain wrapped within a corporate structure, the change being merely to a different corporate structure, makes them seem okay.

Now expect a "Pro from Dover" to come on and quote a,b and c reduce my initial view to gibberish.

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By Adam12345
25th Sep 2019 12:36

More of a legal issue than a tax or accounting one.

The danger is that the company goes insolvent and then the IP will look at this loan write-off which could land the director's in hot water and they could end up repaying the £200,000 anyway.

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Replying to Adam12345:
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By The Dullard
25th Sep 2019 13:52

Adam12345 wrote:

... More of a legal issue ...

What like company law, where it would probably be considered to be a distribution of the company's assets?

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Replying to The Dullard:
Lone Wolf
By Lone_Wolf
26th Sep 2019 11:41

The Dullard wrote:

Adam12345 wrote:

... More of a legal issue ...

What like company law, where it would probably be considered to be a distribution of the company's assets?

That was my worry, and further research hasn't allayed that fear.

Having looked furtehr into this I'm pretty certain it would be viewed as a distribtuon.

One case highlighted by Croner-i is Aveling Barford LTd v Perion Ltd [1989]:

"In Aveling Barford Ltd v Perion Ltd [1989] BCLC 626, the court held that the transfer of an asset at undervalue between two companies under common ownership amounted to an unlawful distribution and reduction of capital as the transferor did not have sufficient distributable reserves.

....

Given the relationship between the parties, the sale at an undervalue represented a distribution, and as the sale amounted to an unlawful reduction of capital, it was incapable of ratification."

Whilst the situation isn't the same, I believe that the write off by Mrs A would similarly be viewed as a distribution. Tax on a £200k distribution is not very welcome.

Plenty of reserves so no danger of it being viewed as unlawful.

Her duties under the Companies Act 2006, in particular s172 and s175, are likely being breached as well so no doubt if things went pear shaped, any interested party could sue and have the transaction overturned - the £200k either being repayable by Development Co, or worse still by Mrs A... one for a lawyer that.

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Replying to Lone_Wolf:
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By Tax Dragon
26th Sep 2019 11:53

The (only) doubt in my mind is that a 50:50 company does not seem to be an "associate" (of your lady) and there's not common control (at least, not, by reference to shares).

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
26th Sep 2019 12:08

Tax Dragon wrote:

The (only) doubt in my mind is that a 50:50 company does not seem to be an "associate" (of your lady) and there's not common control (at least, not, by reference to shares).

Well, that has it's own story which I am now privy to.

Development Co started off life as a 100% subsidiary of Trade Co. Money was lent, and a derelict property bought with the intention of developing.

Mrs A's brother will be doing the development work mostly, and so 50% of the shares were subsequently transferred to him (well actually his wife) so that he shared in the profit. Company wasn't worth anything at that point.

Cue the threat of legal action, and the other 50% was transferred from Trade Co to Mrs A. Very little work done so value still not an issue.

Trade Co has continued to fund the build, interest free. Legal threat has increased and now we have the loan write off situation.

Looking at all the facts, I can't see the outcome being anything other than a distribution.

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Replying to Lone_Wolf:
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By Tax Dragon
26th Sep 2019 12:18

Facts always help with analysis.

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Replying to Tax Dragon:
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By whitevanman
26th Sep 2019 21:35

Not by reference to shares but trade co has loaned money to devco and is therefore a loan creditor (until the loan is formally released) and a participator.
One of the tests for control concerns rights to assets on a winding up (of devco).
Mrs A owns 100% of trade co. So, when considering her rights on a winding up (of devco), she is attributed with the loan also. She would therefore get the value of the loan plus 50% of whatever was left. Inevitably that would be more than 50% of the assets available for distribution (absent any other relevant factors) and she would be considered to have control of devco ( for tax purposes) upto the time the inter company loan was released. In that case the companies would be associated (should it matter).
Of course there may be other loans (DLA) that could affect the maths both before and after the inter-company loan was released. As is often the case, we just don't have enough facts.

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