Loan between connected parties

Tax treatment?

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I would be grateful for definitive guidance on this point. Company A and Company B are both 100% owned by the same sole director. Company A lent Company B £30,000 to invest. The director now feels that B will be unable to pay back A, and so wants to write off the loan. I have read conflicting advice on this topic and seek clarification, please, as to the tax consequences, if any. Thanks in anticipation.

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By David Ex
12th Feb 2024 13:52

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm35000

Could you set out the conflicting views you have read?

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Replying to David Ex:
By Ruddles
12th Feb 2024 14:10

David Ex wrote:

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm35000


That deals with the tax consequences for the companies. As for the potential implications for the shareholder ...
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Replying to Ruddles:
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By David Ex
12th Feb 2024 14:27

Ruddles wrote:

That deals with the tax consequences for the companies. As for the potential implications for the shareholder ...

Hadn’t even spotted that!

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Ivor Windybottom
By Ivor Windybottom
12th Feb 2024 14:21

The rules for connected party loan relationships are likely to mean that neither company recognises any taxable debit or credit.

However, it may be necessary to consider if there is any deemed distribution taxable on the shareholder.

Where value passes from one company to another there may be circumstances where a shareholder is taxed on the value (s1000 CTA 2010 and s385 ITTOIA 2005).

The idea seems to be that the credit in the receiving company is similar to a dividend that is reinvested into the company, hence the rules to treat the credit as a taxable distribution, although I don't entirely follow the logic (as the funds cannot be drawn from company B without a further dividend tax charge).

A solicitor may be best placed to draw up the paperwork, as a Deed to waive the loan is a reserved activity, which accountants are not permitted to prepare.

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Replying to Ivor Windybottom:
By Duggimon
13th Feb 2024 10:47

The funds needn't be withdrawn from B as a distribution though, it could be repayment of a DLA or something else giving benefit to the owner without necessarily incurring a tax charge.

The issue is whether the loan was given by virtue of the owner's shareholding in A (it must be, it's entirely under his control) and whether he received the benefit of the loan being given to B and then later written off (we don't know). It's largely about motive and whether it has facilitated a tax advantage that wouldn't otherwise have existed.

That said, if the end result is a tax disadvantage that wouldn't otherwise have existed, that's absolutely fine and dandy.

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By Martin B
13th Feb 2024 12:46

Loan between connected parties. For future reference.

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