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Increasing Share Capital

Convert Inter-Company Loan to Share Capital

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Husband and wife have a sizeable trading company (Company A). Accounts and tax are looked after by a national firm of accountants.

I was engaged a number of years ago to form a company with the purpose of investing in residential properties on a buy to let basis (Company B).
Client was not interested in any tax advise and just wanted to go ahead with this so I am not involved in their personal taxes.

Company B was formed with 100 £1 shares (my default formation) and on the client's instruction was issued to the husband as the sole shareholder.
I did ask the question as to why it is not 50/50 and they explained bad credit history of wife may prove obtaining mortgage difficult.

Over the last 4 years they have continued purchasing on average 1 property per year. Company A lends the deposit money for every purchase and on average this is 25% of the property price.

When i have prepared the Accounts the creditors I have are the mortgages and the inter-company loan with Company A.

Client went for mortgage renewal and broker has advised that lenders have refused to renew on the basis that there is another creditor other than the lender.

Figures at the last set of Accounts were approximately as follows:

Assets                                          £800,000

Mortgages                £600,000
Inter-Co Loan          £200,000

I will come to the instruction I have now been given by the client (advised by broker).

What I wanted to tackle first is, has anyone else come across this as a reason for refusing mortgage? Surely any BTL Company will have funds from a director for the deposit and therefore a creditor other than the mortgage provider. A Company cannot just have reserves from day 1 somehow. I accept in this case it is an inter-company loan and not a directors loan but the conversation I've had witht the broker suggests it doesn't matter either way, the mortgage provider does not want to see another creditor on record. I mean, have I been doing these BTL Company's wrong all these years?

Coming to the proposed action by the client:
As the wife's credit history is now clear, they want to transfer 100% ownership of the Company to the wife - I can't see any immediate issues here. Spouse to spouse transfer of 100 shares - Please let me know any other items I should take into consideration.

Second point - Client wants to get "rid" of the creditor i.e. the inter-company loan prior to their next year end date. The Company only generates reserves of circa £30,000 per annum and b/f reserves was only £10k so there is no way of clearing the loan out in full. The broker has advised that the inter-company loan is converted to additional share capital.

The way I see it:

- Move the inter-company creditor of £200k to directors loan (wife)* see below
- Issue additional share capital of £199,999** see below

*Should I be requesting anything in writing from their accountants or the client to confirm that a similar action will be taken in Company A i.e. inter-company loan will be charged to the directors loan account in Company A which would then validate the transfer in Company B (and obviously make me feel confortable it is done correctly on both sides and i have it in writing). Any overdrawn DLA or P11D issue is their problem at Company B should they not have enough of a balance.
 

**I could do with step by step on this as it's been been sometime since I've dealt with something like this.
I can deal with the Companies House side. Client will also need to pay 0.5% stamp duty which I am confortable dealing with. Is there anything else I need to do?
I have explained to the client "losing" such a balance and the implication on any future withdrawals and that they can only come from reserves and it will be taxable. Again, client is not bothered about this and just wants a positive balance sheet i.e. circa £200k so the bank will lend easily in future.

Please let me know if I am missing anything and thank you for your time and sorry about the long read. I've tried to make sure I am covering all facts. Whilst I appreciate there are long term personal tax matters to consider, in this case it's not my problem and the client has not engaged me for this. I simply point out the issues concerning this Company in isolation and keep reminding them to ensure they have obtained advise on their personal matters.

Thank you all.

 

 

 

 

 

 

 

Replies (8)

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By David Ex
14th Jul 2021 11:37

Just make sure the limits of your engagement are clear. What reason is there for having you deal with just a very limited part of the affairs?

If one BTL lender has issues, ask another but ultimately they will all have their own T’s & C’s. Would have thought the mortgage broker would be the best placed to deal with that point.

“The broker has advised that the inter-company loan is converted to additional share capital.” Not sure that the broker should be giving that sort or advice but not surprised. They presumably Just want the business at any cost.

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Replying to David Ex:
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By HiddenAccountant
14th Jul 2021 12:56

David Ex wrote:

Just make sure the limits of your engagement are clear. What reason is there for having you deal with just a very limited part of the affairs?

If one BTL lender has issues, ask another but ultimately they will all have their own T’s & C’s. Would have thought the mortgage broker would be the best placed to deal with that point.

“The broker has advised that the inter-company loan is converted to additional share capital.” Not sure that the broker should be giving that sort or advice but not surprised. They presumably Just want the business at any cost.

I have made it very clear re scope of my engagement being limited to the BTL and simply preparing on the basis of activity in the year - As I am not involved in the other Co or personal tax I cannot give tax advice.

I did suggest trying another lender but broker is pushing back - usual scenario, broker will recommend client the deal that pays them the most and not look at what is best for the client. And client is typical in that they listen to advice they want to hear.

Agree re broker advising on share capital but the idea is now in client's head.

Thanks.

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Replying to David Ex:
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By HiddenAccountant
14th Jul 2021 13:15

David Ex wrote:

Just make sure the limits of your engagement are clear. What reason is there for having you deal with just a very limited part of the affairs?

Sorry David, missed the first part of your response.
I believe they came to me based on cost. Initially they were looking at 1 property only when this was setup.

When I met with them originally they made it out that the job was too small for their current firm so they were looking for someone to just handle it for them. Later they accidentally slipped that they were quoted £4,000 per annum for the annual compliance!!! you can imagine the look on my face as I had charged them £750 (We're now up to £1,200 per annum).

Makes me wonder what they pay for their main Company and it is worth saving a few thousand and get long-term planning wrong.

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paddle steamer
By DJKL
14th Jul 2021 11:52

S455 liability for original company springs to mind.

Nobody can advise correctly without having a complete overview of Company A, Company B and personal tax.

And just as an example, the existing loan from Company A to Company B may have already tainted the "trading "status of the shares in Company A re say BADR, it might turn out to have already been a big mistake for the client executing such arrangements before taking professional advice.

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Replying to DJKL:
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By HiddenAccountant
14th Jul 2021 13:00

DJKL wrote:

S455 liability for original company springs to mind.

Nobody can advise correctly without having a complete overview of Company A, Company B and personal tax.

And just as an example, the existing loan from Company A to Company B may have already tainted the "trading "status of the shares in Company A re say BADR, it might turn out to have already been a big mistake for the client executing such arrangements before taking professional advice.

Thanks DJKL.
I agree re S455 hence my comment that the overdrawn DLA in Co A is their issue to deal with via their other advisors since I have no involvement.
I was simply looking at what others would do in this scenario. Would you be looking at obtaining written confirmation from the advisors/clients that the corresponding entry is being put through in Co A i.e. DR DLA & CR Inter Co Loan

Thanks

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Psycho
By Wilson Philips
14th Jul 2021 12:09

What exactly does the broker imagine the end-position to be? There are (at least) a couple of options here:

Simply convert the intercompany loan into shares, with A becoming a shareholder in B. But if A is a trading co, that might cause problems re BADR/BPR.

A assigns its debt to wife, with loan converted into additional shares for wife. That does raise the prospect of s455 implications in A, though.

Stamp Duty is not payable in either case.

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Replying to Wilson Philips:
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By HiddenAccountant
14th Jul 2021 13:05

Wilson Philips wrote:

What exactly does the broker imagine the end-position to be? There are (at least) a couple of options here:

Simply convert the intercompany loan into shares, with A becoming a shareholder in B. But if A is a trading co, that might cause problems re BADR/BPR.

A assigns its debt to wife, with loan converted into additional shares for wife. That does raise the prospect of s455 implications in A, though.

Stamp Duty is not payable in either case.

I am staying away on advising and going on their instruction which I've made very clear to them as they seem to listen to any advice that suits them.
They want to go with additional shares to wife - Thanks for pointing out the stamp duty issue, I had missed that point but you are correct.

Excluding the BADR issue it seems there is no obvious issue from standalone point for Co B. However, as per my first question, would you look to obtain written confirmation that Co A will also make the corresponding entries or would you just go with it based on the client's instruction?

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Replying to HiddenAccountant:
Psycho
By Wilson Philips
14th Jul 2021 13:15

If you’re going with my second option, this clearly requires the co-operation of A (as does my other suggestion). You can’t (or shouldn’t) convert wife’s loan to shares until you have evidence of the assignment of the loan. It’s up to A’s advisers to find out what has happened and ensure that appropriate accounting/tax treatment is applied. That is none of your concern.

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