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