Is this a benefit in kind and S455

Director lends money to his sole trader business

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A one person company / director lends £35,000 interest free to his sole trader business. This is for help with working capital and buying assets for the business.

The loan is still outstanding at the financial year end, is this a possible S455 loan to a participator and a  benefit in kind charge payable by the Director or are the rules different as it's for trade purposes and not for personal purposes. 

What if any are the possible tax consequences of this arrangement.

Replies (15)

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By Accountant A
06th Oct 2016 11:07

The company has lent money to a director. Assuming a complete lack of evidence to the contrary, what the director has used the funds for is beyond the control of the company (as a legal entity). I assume therefore that the usual provisions re loans to directors apply.

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By Portia Nina Levin
06th Oct 2016 11:10

It is loans to frigging PARTICIPATORS!!!!

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Replying to Portia Nina Levin:
RLI
By lionofludesch
06th Oct 2016 13:29

Surely it is "They are loans to frigging PARTICIPATORS!!!!"

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By Euan MacLennan
06th Oct 2016 11:29

The company has lent £35,000 to a participator (I assume that the one man is a shareholder), so unless the company is in the business of making loans, a charge arises under s.455 as it does not fall within the circumstances for exception listed in s.456 CTA 2010.

The beneficial loan BIK does not apply where, if interest were paid on the loan (whether or not it actually is), it would qualify for relief against the profits of a trade conducted by the borrower (director) - see s.178 ITEPA 2003.

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RLI
By lionofludesch
06th Oct 2016 12:06

It's not a possible s455 loan.

It's a definite one.

There's no question.

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By Marky
06th Oct 2016 16:17

The section 455 can be avoided by way of a bonus, dividend declared or paid within 9 months.
It's the BIK part I'm struggling with. So should the director enter this interest at 3% on a P11D at the official rate and the sole trader company claim a deduction against profits even if no interest was paid to the company.

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Replying to Marky:
RLI
By lionofludesch
06th Oct 2016 16:26

Marky wrote:

The section 455 can be avoided by way of a bonus, dividend declared or paid within 9 months.
It's the BIK part I'm struggling with. So should the director enter this interest at 3% on a P11D at the official rate and the sole trader company claim a deduction against profits even if no interest was paid to the company.

OK - so why not pay it ?

Director's bik reduced to zero, clear payment of interest by his business.

Everyone's a winner.

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Replying to lionofludesch:
By Ruddles
06th Oct 2016 16:29

Especially if he is a higher rate taxpayer.

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Replying to Marky:
By Ruddles
06th Oct 2016 16:27

No no no. First step - determine whether he could have claimed a trade deduction for interest paid on the same loan from, say, his bank. If the answer is yes, you need do nothing.

If the answer is no, then that's the point at which you need to consider charging interest (directly or via DLA) to avoid the BIK.

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Replying to Marky:
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By Euan MacLennan
06th Oct 2016 18:18

Marky wrote:

It's the BIK part I'm struggling with. So should the director enter this interest at 3% on a P11D at the official rate and the sole trader company claim a deduction against profits even if no interest was paid to the company.

No - re-read the last paragraph of my earlier response at 11:29 and s.178 ITEPA:

Euan MacLennan wrote:

The beneficial loan BIK does not apply where, if interest were paid on the loan (whether or not it actually is), it would qualify for relief against the profits of a trade conducted by the borrower (director) - see s.178 ITEPA 2003.

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By Marky
06th Oct 2016 16:18

Sorry. meant to say business not company

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By Marky
06th Oct 2016 17:08

I understand if the interest was paid at the year end to the company then nothing to do but can you retrospectively go back six months later and charge interest to avoid the BIK 2015-2016.

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Replying to Marky:
By Ruddles
06th Oct 2016 17:59

No

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By Marky
06th Oct 2016 18:18

Thanks Ruddles
So the P11D must be sent.

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Replying to Marky:
By Ruddles
06th Oct 2016 18:57

Not necessarily.

Would interest on the loan, IF it had been paid, been deductible in computing the trade profits? If the answer is yes, then the loan should be exempt from the BIK provisions - as already clearly explained to you more than once -see in particular Euan's posts. I'm not sure how much more plain we can make it. If you're still not getting it, I suggest an alternative career path.

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