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Holding Company what benefits?

Client has 2 seperate LTD companies, would Holding Company Structure Help?

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My client has two LTD companies, one providing day care services and one owns 2 properties.  Money has been borrowed from day care service LTD company to the Property LTD company, I have stated this needs to be repaid by year end as they currently have no legal connection.  If we set up a Holding Company connecting the two, would this solve the issue of the loan between the two?  The loan has been used to purchase a property so the money is tied up and can't instanly be repaid.

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By Tax Dragon
15th Jan 2020 11:57

What's the issue you are solving?

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Hallerud at Easter
By DJKL
15th Jan 2020 12:17

"I have stated this needs to be repaid by year end as they currently have no legal connection."

This is possibly your issue- there is no particular accounts/legal/tax reason this is necessary, albeit maybe there is a banking issue caused by the inter company loan or something else you have not explained.

As a PS, be careful, if propco is covered by FRS102 reporting ,that you do not so structure the loans (term/interest etc) that their valuation starts to become an issue you had not considered you would have to deal with- the joys of FRS102 allowing revaluation but wrapping you in dealing with financial instrument valuations ought not be overlooked.

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Replying to DJKL:
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By Tax Dragon
15th Jan 2020 12:28

I'm not sure whether you have answered my question, or merely repeated it using more words.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
15th Jan 2020 12:31

Merely repeated it with far more words but possibly with a sharper focus on what I believe is the OP's main misunderstanding.

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Replying to DJKL:
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By Tax Dragon
15th Jan 2020 12:38

You have greater insight than me. (Most AWebbers probably agree that comment!)

I got as far as suspecting there were misunderstandings, but I was waiting to hear back from the OP before daring to form a view as to what they might be.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
15th Jan 2020 12:47

Not so, you know what they say about assumptions.

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By paul.benny
15th Jan 2020 13:58

SUZANNE2406 wrote:
... I have stated this needs to be repaid by year end as they currently have no legal connection...The loan has been used to purchase a property so the money is tied up and can't instanly be repaid.

It sounds like the loan is de facto long term but in the absence of any documented agreement, you've classified it for stat accounts as short term. If the parties formalise the terms (repayments, interest) to reflect the economic reality, that mismatch goes away.

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Replying to paul.benny:
Hallerud at Easter
By DJKL
15th Jan 2020 14:11

But as I mentioned, be aware re valuation issues re said loans in propco if say it wants to use FRS102 to permit revaluation of its investment property.

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By SUZANNE2406
15th Jan 2020 14:13

As the company loaning the money also owes money to the bank, I was concerned this wasn't a legal practice. There is currently no agreement in place for repayment or interest payable. If an agreement was put in place does this resolve my issue? and how is this declared at year end?
Thanks all, the question is down to my lack of understanding as not come across this before.

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Replying to SUZANNE2406:
Hallerud at Easter
By DJKL
15th Jan 2020 14:43

An agreement may well need disclosed in notes to accounts, subject to what it says/security issued etc-even if not the loans will likely need reported anyway re related parties note whether or not there is a formal agreement.

Whilst formalising arrangements and charging interest may appear neat it can give issues re accounts disclosures and valuation metrics re the loan for both the lender and the borrower, so you want to chat through with your external accountants and you certainly want to check out any covenants within the extant bank facilities before doing anything.

You also , if interest is to be considered, need to review whether borrowing company can get tax relief for it under NTLR rules as the lending company will certainly trip a tax liability charging it- also consider ER relief re shares in the lending company and BPR relief - you do not want to create a one sided tax transaction, or impact possible existing reliefs, so careful thought ought to be applied before doing anything.

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Replying to SUZANNE2406:
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By paul.benny
15th Jan 2020 17:12

There's no obvious illegality here. Presumably the bank are aware of the loan.

With no agreement, it's reasonable to treat the loan as repayable on demand and therefore a current asset/liability in lender and borrower respectively. An agreement might specify repayment due on sale of property, or equal annual instalments, or whatever. You can then treat anything not due in the next year as non-current asset/liability for stat accounts.

The stat accounts should disclose the repayment terms, rate of interest (which could be nil) and whether the loan is secured (given there is no loan agreement, probably not).

If the loan is repayable on sale of property, the auditors of the borrower will likely require a representation from the directors that there is no intention to sell the property in the 12 months from year end.

If there is an agreement saying that the loan is repayable - on sale of the property.
But it's slightly misleading for the lender to classify the receivable as a current asset when the borrower cannot readily repay the loan within a year. (that said, t

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By Tax Dragon
15th Jan 2020 15:17

Repaying the loan(s) doesn't sound like an option anyway, so there's not much point saying they have to. But that doesn't mean there isn't a lot to think about. I guess your job is helping with reporting obligations; others
have helped you there.

On the planning (possibly not your problem), ideally the owner would have taken advice up front. If that didn't happen, it'd be worth doing it before too long.

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By Matrix
15th Jan 2020 20:22

Yes there are tax benefits of setting up a holding company which have not been addressed here.

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