Inter-company loan agreement Amendment - risks?

Hello, Please advise if any concerns about this change to a loan agreement

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Hello everyone,

Two married clients are directors of  two different companies (Company A and Company B).

Company B is an SPV used for BTL,

Company A loaned start up costs to the tune of 140K to Company B to get it off the ground with an intercompany loan agreement at 3%. This was declared to me in year 3. However there were no profits by company B for year 1 and 2 in fact company B had a loss. Periodic repayments including interest have been made however the clients have advised they now wish to change the terms of the loan agreeement as they are now aware they are making a tax loss.

This is because they save 19% corporation tax with company B on the interest payments however they then pay 25% on the interest when received in company A- therefore a tax loss.

After paying this once, they have informed me they have had a meeting and decided for the loan to be interest free as they erroneously also thought the loan could be written off against recent (year 3) Company B profits which I advised they could not be. Is this advisable? what if anything should I make sure is documented. 

Any advise  appreciated, thank you.

Replies (10)

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By David Ex
18th Jun 2024 11:07

I wouldn’t get involved in trying to draft legal agreements. Refer them to a solicitor.

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By Bobbo
18th Jun 2024 11:36

Account_101 wrote:

 Two married clients are directors of  two different companies (Company A and Company B).

Who are the shareholders of each company?

Account_101 wrote:

 as they erroneously also thought the loan could be written off against recent (year 3) Company B profits which I advised they could not be.

I'm not clear what's even being suggested here? How can Company B write an amount it owes against its profits? Writing off the loan would increase Company B profits??

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Replying to Bobbo:
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By Paul Crowley
18th Jun 2024 14:55

+1
The story seems reversed.

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Replying to Bobbo:
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By Account_101
20th Jun 2024 16:08

The couple are both the only directors and shareholders of both companies A and B.

I admit to not having many clients but a significant number of people think start up loans can be put through as expenses to reduce Profit and therefore CT.(Hence the word erroneously).
The absolutely want the loan repaid-they just want it at zero percent with no interest

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Replying to Bobbo:
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By Account_101
20th Jun 2024 16:09

Hence the word erroneously....

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By FactChecker
18th Jun 2024 13:36

If the driving force is CT, might be worth having a read of https://www.taxinsider.co.uk/associated-companies-and-corporation-tax
... depending on the shareholdings, not directorships, of A and B.

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By Paul Crowley
18th Jun 2024 14:54

Sounds to me as if the client did not take good advice at the time.
Was the intension to write off the intercompany loan there at the outset, or a 'clever' idea thought of afterwards?

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Replying to Paul Crowley:
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By Account_101
20th Jun 2024 16:08

No they definitely want to repay the loan and have made regular annual payments.

Can they change the interest rate to Zero?

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By Account_101
20th Jun 2024 16:12

Thank you everyone- I appreciate the question is a bit wordy.

The short version is
Can they change the interest rate terms mid-payments to zero, therefore repaying the loan but with no interest?
A lawyer will be drafting said amend to the agreement

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Replying to Account_101:
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By Bobbo
20th Jun 2024 16:23

Can a lender agree with a borrower to change the terms of the borrowing?

Yes, of course. They could agree to make the interest rate 100% per month if they wanted. Probably not wise but they *could*.

As the directors of the lender and borrower are the same people they would essentially be agreeing the amendment with themselves.

Whether there are other consequences of such an amendment I make no comment on.

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