Loan Ltd Co A to Ltd Co B & writing off the debt?

Have sought paid for advice but still nervous... (second company is to invest in property)

Didn't find your answer?

Good day,

I have sought paid for advice which advised me that this was okay, but I am nervous due to the personal sums involved and I wanted to see if anyone concurred (or not).

Apologies if I come across as a newbie, but I am fully aware that in this field one does not know what they do not know...

After many years I have built up £500,000 of post-corporation and other tax profits in Limited Company A, which is a business consultancy and training company.

Rather than have the funds sitting doing nothing, my goal is to generate long term (relatively) passive income whilst retaining the capital for my children’s future inheritance.

I therefore wish to invest in a property letting business. I have already undertaken lots of research and I have let property before, albeit not under the umbrella of a Limited company.

My plan is the following:

  1. Open a new Limited Company B with the appropriate business SIC code for property letting. This is also known as an SPV (Special Purposes Vehicle)
  2. Transfer the £500,000 within my existing Limited Company A to the new Limited Company B as a loan.
  3. Immediately write off that loan, no interest or so forth (also possibly removing albeit the unlikely risk of Limited Company A being sued in teh future and someone going after the Limited Company B assets).
  4. Buy the property and let it under the name of the new Limited Company B and handling and income or gains form that business in the customary fashion. .

The shareholding structure of the current Ltd Company A is myself as sole director having 60% shareholding and my wife as an employee having 40% shareholding. The same shareholding structure is intended for the new Ltd Company B property busines. 

MY QUESTION

My research and paid feedback suggests that that the debits and credits here are ignored for tax in both companies.

However, I wanted to get a second opinion because I do not want the risk for instance of being charged unintended/doubled up corporation tax  or other additional charges.  

Thanking you sincerely for anyone that might kindly give up their time responding or even signposting me to a website that will give me the answer. 

Warm regards

Gavin

P.s. happy also to pay someone again for a definitive answer

 

 

Replies (16)

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By paul.benny
07th Feb 2022 10:47

There are two questions you might have asked your adviser:

- I’m planning on doing as outlined in the OP. What are the tax consequences?
Or
- I have these objectives (long term investment for inheritance planning, using funds accumulated in my company). What tax efficient options are available?

I suspect you’ve done the former which may mean the advice given is limited to the scope of your question. There may well be no adverse tax consequences of your initial loan/investment, but that’s not the complete picture. Asking a broader question may lead to some wholly different plans.

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Replying to paul.benny:
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By Gavinmak
07th Feb 2022 11:33

You are correct that the advice was focused on the first question and that is my main concern (at the moment).

However, I do have some general longer terms plans (based upon some research and a lttle separate offical advice, but I probbaly need more work here). Broadly speaking:

- Interitance: what I plan do is be able in future to issue shares (or class B chares) to children in terms of inheritance planning.
- I may pay some personal money into the new property company too (own clear income and possibly remortage own home at lower interst rates to invest into the property business) which cam be drawn down again of course.
- I have not decided whether to take money from the property business or reinvest (or borrow more against it).
- Entrepreneurs Relief (as it was formelry called) I will lose the option for Company A, but I am not planning to close that business.
- The income would be/compliment pension income.
- I have a pension fund, and in terms of tax planning probably need to consider placing more into this and diversify.
- What I have not considered is shares - it scares me since it is a knowledge gap and I am risk adverse. I know there is property risk too, but I have more experience there.

I'm sure I have gaps.

I missed the forum rules on this - but is one allowed to, if not recommend, possibly advise who might be capable of running through wider plans in this area?

Many thanks for having taken the tme to responsd.

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Replying to Gavinmak:
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By paul.benny
07th Feb 2022 12:38

I suggest you go back to the beginning and determine what you are trying to achieve rather than jumping into a solution.

For example, if you are set on property investment you *might* be better owning it through a SIPP rather than another company.

You may be better with a good financial adviser who can consider your wider circumstances, identify your priorities and call on tax specialists as necessary.

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Replying to paul.benny:
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By David Ex
07th Feb 2022 13:48

paul.benny wrote:

For example, if you are set on property investment you *might* be better owning it through a SIPP rather than another company.

I'd assumed residential letting but ...?

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Replying to David Ex:
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By Gavinmak
07th Feb 2022 14:21

Yes, residential is correct. The main goal would be for onoing income now onward (age 47).

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Replying to David Ex:
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By Gavinmak
07th Feb 2022 14:22

Yes, residential is correct. The main goal would be for onoing income now onward (age 47).

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Replying to Gavinmak:
paddle steamer
By DJKL
07th Feb 2022 12:56

"- What I have not considered is shares - it scares me since it is a knowledge gap and I am risk adverse. I know there is property risk too, but I have more experience there."

If you are mainly invested in property you are certainly not risk averse, if you are happy to concentrate your wealth mainly in one asset class(property) that is not being risk averse and experience does not really help if changes impact the whole sector.

Residential property and letting it is one industry HMG can hit en masse with one Act of Parliament and as there are more votes in those renting than in those who are landlords, work out where the loyalties of politicians may lie. (just take a look at the current Scottish Government discussions re rent controls etc to see which way the wind may be blowing)

https://www.lettingagenttoday.co.uk/breaking-news/2021/8/rent-controls-t...

Meanwhile commercial property is adjusting to our brave new world plus has looming Energy Performance as something that could make letting older properties very expensive.

Fine, property as an asset class ought not to be ignored, but if you are blindly going all in with property you are not risk averse and do remember there is a reason most people advising re investments suggest diversification. (And of course you can get property exposure via shares etc anyway, I own a decent chunk of logistics sheds via their equity through ITs)

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Replying to DJKL:
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By Gavinmak
07th Feb 2022 14:27

Good points throughout. I probably understated the property risk, although I am certainly aware that the Government can quickly hit the sector en masse (and already has done what with removing mortage interest relief et al, and I do wonder whether property only Ltd companies will be hit next).

I probably need to investigate other asset classes in more depth.

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Lone Wolf
By Lone_Wolf
07th Feb 2022 14:21

A few points to ponder:

- How can there be a loan if the intention before granting it is to write it off. I do not believe we have a loan relationship here at all. There is no intention to repay this money.

- I think what we have here is a distribution to the shareholders (i.e. you and your wife) from Company A. This is not being done for the benefit of Company A's business. It is being done at the behest of the shareholders, for their benefit, and the write off is almost certainly a distribution. This distribution would be taxed on you both as income at dividend rates.

- I believe that whoever has given you the advice that this is "okay" is basing it on ignorance largely. They are not aware that there is an issue, and have possibly carried out such moves in the past and not been caught. Not being caught doesn't mean the course of action was okay. I've never been caught speeding - doesn't make it right when I hit 80mph on the motorway, nor does me telling you it's okay to speed make it okay when the plod pull you over.

I would advise that you need to re-think your strategy, and perhaps look for further paid for advice as to how best to do all this.

PS. Are you still trading via Company A? If so, the time to do anything with shares etc. would be before you cease.

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Replying to Lone_Wolf:
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By Gavinmak
07th Feb 2022 14:53

Thanks for the response.

The individual (in my eyes) knows their stuff and deals with this area for various clients directly related to property investments. They run accounts for them too. They could be wrong on the advice of course (and it is important for me to be sure, hence writing here) - I only mention this bit for context to say I did not just use a random advisor.

The main goal is to use the money built up in Company A to buy property assets for letting and ongoing income. The reason for setting up Company B is simply due to Company A not having the appropriate business SIC code to be involved in property activities, and that can disallow for instance obtaining a business BTL in the future.

The loan could theoretically remain on Company A's books. Writing it off was more a consideration after the event mainly for tidiness and segregation. I would also be paying in personal funds into Company B as a director loan.

I am still trading under Company A and I intend to do so for many more years to come.

I had assumed/hoped that I would then pay income/dividend tax on what I might received from the sister Company B and not before.

I had found this link: https://www.accaglobal.com/my/en/technical-activities/technical-resource...

It has the following section (albeit there is more context on the webpage)

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Loans between connected parties:-

The situation, however, becomes more complicated where the parties are connected. The general rule is that where the debtor and creditor in a loan relationship are connected in any part of an accounting period and the whole or part of a loan is written off, then this is effectively a ‘tax nothing’, ie the creditor company cannot claim relief for the amount of the loan written off and the debtor company does not incur a taxable loan relationship credit.

There is, however, an exception to the above when the creditor company is in insolvent liquidation; a creditor company may claim an impairment loss in these circumstances.

********************************

I foudn this too I found an interesting discussion here (near the bottom) https://www.accountingweb.co.uk/any-answers/sister-company-loan-write-of...

I guess there is no way to getting definitive advice fomr HMRC in advance. TO be honest I don't know who or what advisor I can contact to obtain secue advice.

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Replying to Gavinmak:
paddle steamer
By DJKL
07th Feb 2022 15:00

"The main goal is to use the money built up in Company A to buy property assets for letting and ongoing income. The reason for setting up Company B is simply due to Company A not having the appropriate business SIC code to be involved in property activities, and that can disallow for instance obtaining a business BTL in the future."

You can have up to four SIC codes re one company.

https://companieshouse.blog.gov.uk/2021/10/12/choosing-a-standard-indust...

I can see reasons why I would not want residential letting in with trading, vat might be an issue or future BADR another, but SIC codes would not be high on my list of concerns.

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Replying to Gavinmak:
Lone Wolf
By Lone_Wolf
07th Feb 2022 15:05

Here's the narrative to the link that stephuran provides:

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Will an unpaid loan from an associated company in liquidation be allowable?

I act on behalf of a limited company client that made a loan to an associated company on a normal **commercial basis**, with interest payable at a **commercial rate**. That associated company has now gone into liquidation and the loan therefore needs to be written off. My questions are as follows.

Under the financial reporting standards for smaller entities (FRSSE), am I right in thinking that this bad debt should be treated like any other bad debt and therefore appear in operating profits and losses and neither is it an exceptional item?

Is there any justification for taking it straight to reserves?
Is this loss tax allowable, ie does the tax treatment follow the accounting treatment in (1) above?
Query 18,442 – Brook

Reply from Paul Steward
For financial accounting purposes, the FRSSE will generally expect this bad debt to be treated in the profit and loss account as any other bad debt arising from conducting the trade.

However, a related party disclosure may be required if it is material. It will only need to be disclosed as an exceptional item if it is relatively large. If the loan was relatively small and there are other bad debts, it should not be disclosed as an exceptional item.

There is no justification for taking it straight to reserves because, generally, only a prior-year adjustment (with specific conditions required) would qualify for this accounting treatment.

For the corporation tax treatment, one must look at the loan relationship rules in CTA 2009, Part 5. First, the bad debt will be “added back” for the purpose of calculating the taxable trading result.

Second, one must apply the loan relationship rules to this bad debt to see whether it gives rise to a deficit on a non-trading loan relationship that can be relieved under Part 5 Ch 16 (“Non-trading deficits”).

There will be a deficit if the companies are not “connected” as defined in CTA 2009, s 466. They will be connected if, at any time during an accounting period, either:

company A controls company B; or
company B controls company A; or
companies A and B are both controlled by the same person.
One must then look at the definition of “control” for this purpose in CTA 2009, s 472, ie whether a person can “secure that the company’s affairs are conducted in accordance with his wishes”. A person can do this by:

holding most of the shares or most of the voting rights in the company; or
any other powers given through the articles of association or any other document.
If, say, there were three shareholders each owning one-third of the shares in each company, there would not be control. Where the two companies are connected, then an “amortised cost basis of accounting” must be followed under CTA 2009, s 349(2).

This means an asset is shown at cost less cumulative amortisation and any impairment under CTA 2009, s 313(2)(b). But bad debts – ie “impairment losses” – are subject to s 354 which differentiates the tax amount from the accounts amount.

Where the two companies are connected, the general rule, subject to the two exceptions in s 354(2) for debt/equity swaps and insolvent creditors, is that no relief will be given for an impairment loss.

Reply from ANA
The general rule in CTA 2009, s 354 is that no tax relief is available for a loss arising on a debt to a connected party. There are two exceptions to this: first, for debt/equity swaps (in CTA 2009, s 356); and, second, for creditors in liquidation (in CTA 2009, s 357).

In the case of the latter, the test is that the loss amount accrues when the company is in liquidation, so the creditor can have impairment relief for any amounts accruing after the date of the proceedings whether or not it continues to be connected to the debtor company. However, there is no relief for any amounts accruing before the date of liquidation.

Brook needs to confirm when the loss was shown in his client’s financial statements. If the loss was only recognised on liquidation, tax relief is available. If, however, any part of the loss was recognised before liquidation (eg through a specific provision), tax relief is available only for that element of the loss recognised after the company had gone into liquidation.

Closer look... loan relationships regime
The replies consider the tax relief for an unpaid loan to an associated company that has gone into liquidation.

In this area, TolleyGuidance explains that, in most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. The provisions are in CTA 2009, part 5.

Relief is available only where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes.

A loan relationship exists where a company stands in the position of debtor or creditor in respect of a money debt that arises from a transaction for the lending of money (CTA 2009, s303(1)).

Although it is often clear that there is a loan relationship (for example, bank overdrafts, term loans and corporate bonds), there are instances where it is less obvious (for example, some types of private equity finance and many inter-company balances).

In addition, certain money debts are never intended as loans and do not meet the definition of a loan relationship in CTA 2009, s 302(1) but frequently give rise to funding costs, foreign exchange movements etc (for example, trade debtors and creditors).

Many of these balances are brought within the loan relationships regime as “relevant non-lending relationships” by CTA 2009, Part 6, Ch 2.

However, care is needed because only specified expenditure is deductible under these extended provisions, while almost all income is taxable.

Generally, amounts arising from a company’s loan relationships are brought into account for tax purposes in line with the amounts recognised in the company’s accounts under GAAP. However there are several exceptions to this general rule.

For example, interest that is added to the capital cost of a fixed asset or project for accounting purposes is deductible for tax purposes on the basis that it would otherwise have been expensed to the profit and loss account.

Further information can be found in HMRC’s Corporate Finance Manual at CFM90000. The guidance there is designed to help practitioners understand the legislation and how the debt cap rules apply to groups.

**************************************************************

I have emphasised the "commercial basis" and "commercial rate" comments, as this is key in my view. If the loan is not commercial, and it is written off, then the write off becomes a dividend in my view.

If the loan is put on a commercial footing, then you'd imagine it would only be written off in the event of Company B becoming insolvent, in which case the connected company provisions kick in, and there is no distribution. A w/o simply to tidy things up will trigger the distribution provisions though.

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Replying to Lone_Wolf:
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By Gavinmak
07th Feb 2022 15:23

First, thank you for your efforts reading through and posting all of that.
I am indeed in a quandry. I have conflicting comments now.
I know there are people that have built up profits in a business and redirected them into property (including setting up a new Ltd company and transfering them, maybe wrongly).
Maybe I can add a SIC code to my existing business and also buy and let property within it (especially if I am not relying on finance lenders who will view that as additional risk and liability).
Hmm.

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Replying to Gavinmak:
paddle steamer
By DJKL
07th Feb 2022 15:26

Be careful if your main company is vat registered as you would be introducing a tranche of exempt sales with your residential property letting which could impact input vat recovery.

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Replying to Lone_Wolf:
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By Gavinmak
07th Feb 2022 15:53

One quicky... can you foresee a burning issue should I simply decide to lend the money from related Company A to Company B for Company B's investment purposes and NOT write off, but rather leave it sitting open until I die or others take over and restructure the buiness? Interest free or with interet if I have to.

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Replying to Gavinmak:
paddle steamer
By DJKL
07th Feb 2022 16:16

Loss /restriction of any BPR relief for IHT re the lending company shares should you die.

Possible impact on BADR re any CGT should you wish to wind up company that is making the loan.

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