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Long term loan from trading company to SPV company

I have a consultant client who wants to loan money from his trading company to a new SPV company

Hi

I have a limited company client who wants to loan 40K from his trading company to a new SPV company to purchase a buy to let property. I have not come accross this before and am worried there are tax complications that i am not aware of?.

The trading companys shares are owned by the client and his wife 50/50 and the new SPV company shares will also be owned 50/50 . The loan will be paid back to the trading company out of SPV company profits over the next 15 years.

The way i see it if he loans the SPV company money and charges interest, the interest would be taxable income to the trading company and an expense to the SPV company, essentially cancelling themselves out, so would interest need to be charged?

Am i missing something?

The client does not want to recive the 40K as a dividend and then reinvest in the SVP as both himself and his wife are already higher rate tax payers.

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18th Mar 2019 17:09

I am by no means an expert in this area, but even I remember something about buy to let interest tax relief being restricted not long ago. Not to mention the complexity of connected companies.

It might be worth getting yourself some CPD pronto, or paid professional advice that you can pass on, or point the client towards.

This sounds like a situation that could go expensively wrong...

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By schocca
to WhichTyler
19th Mar 2019 11:17

WhichTyler wrote:

I am by no means an expert in this area, but even I remember something about buy to let interest tax relief being restricted not long ago. Not to mention the complexity of connected companies.

This restriction is only valid for BTL assets held personally. A limited company is not affected by this restriction.

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By DJKL
18th Mar 2019 17:52

ER relief re the trading company being maybe prevented from claim in future possibly springs to mind as a downside, but given presumably happy to have trading company for next fifteen years, and pay costs of running the trading company for that long, maybe not a consideration.

Would certainly be asking client what his intentions are re the trading company as if say expected to say pack up in ten years he will possibly have accountancy fees for five further years until the loan is repaid (though of course it might get repaid faster or slower)

Why does he want the property in SPV limited company in the first place, is it merely tax relief on the interest driving his decision making, has he considered the costs of operating a second company etc?

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By schocca
to DJKL
19th Mar 2019 11:15

re why SPVs? - A lot of BTL lenders will only lend to corporate entities that are SPVs (with the correct SIC code).

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19th Mar 2019 07:06

Why this structure? (Who suggested it - you or them?)

Why not buy the property in the existing company? (I'm not saying that's better - I'm trying to get under the skin of your question.)

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By schocca
to Tax Dragon
19th Mar 2019 11:23

There are two primary reasons for this (off the top of my head):
1) A significant amount of lenders will only lend to companies that are SPVs with the correct SIC code.
2) Is the company a trading company or an investment company? There is tax implications here and thus creating an SPV (with an investment purpose) and lending to it from a trading company can make sense.

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to schocca
19th Mar 2019 12:16

Are you answering on behalf of the OP? Yours are stock answers. Tailored tax advice should do better than trot out stock answers, hence my questions.

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By schocca
to Tax Dragon
19th Mar 2019 12:24

See here re SIC codes for SPVs (first example I came across) - https://bespokefinance.info/insight/13-limited-company-buy-to-let-faq

Ltd Co BTL guide from Fleet Mortgages:
https://www.fleetmortgages.co.uk/wp-content/uploads/2018/05/Limited-Comp...

etc... etc... do you want more examples?

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By DJKL
to schocca
19th Mar 2019 12:26

Re 2 what may happen to a trading company which uses part of its funds to lend to A N Other SPV Company, is it still a trading company?

It may be but it also may not be.

Re 1 i have never had the SIC code issue re borrowing within a company re investment property but perhaps that is because we tend to borrow on a portfolio basis rather than on a property by property basis , albeit these days we no longer really bother with residential property, having sold all but one of them.

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By Reado
20th Mar 2019 11:40

Hi thanks for your reply's

I was ill yesterday and not at work, sorry for the late response.

Yes the client needs a SPV company as this is the only way he can get a BTL mortgage in a limited entity.

My worry is that the loan to the SPV company from the trading company (client is 32 years old with no intention of ceasing trade) could be con screwed as a directors loan or something of that nature with unforeseen consequences.

I have today contacted a tax partner at a very large firm, she confessed she did not know ! but will get back to me, i will let you know her advice as i suspect with the increase in limited company's this will become a common issue for accountants.

many thanks

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By Reado
20th Mar 2019 14:30

Hi

So the advice I've been given from a tax partner at a fairly large firm is below.

No issue with an inter company loan (with the same directors). Do though have to make sure the loan is paid back before dividends from the SPV company are paid to the directors, this is because HMRC could view this as a S455.

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to Reado
20th Mar 2019 14:37

I don't really see a problem with the structure you are proposing.

As for:-

Reado wrote:

Do though have to make sure the loan is paid back before dividends from the SPV company are paid to the directors, this is because HMRC could view this as a S455.

can't really see the basis for this. Having said that likely to be a non issue as dividends could just be paid out of the trading company anyway.
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to Wanderer
20th Mar 2019 14:59

Wanderer, following this (and some of your other responses), may I ask... how familiar are you with the machinations of s459?

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to Tax Dragon
20th Mar 2019 15:11

Pretty familiar, but, as always, happy to be corrected.

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to Tax Dragon
20th Mar 2019 15:20

Section 459 should not, in theory, apply if the dividends from the SPV are included in total taxable income.

However, I have - as I think I expressed elsewhere - a problem with the wording of section 459 (and related HMRC guidance). It says that section 459 will not apply where the amount included in total income is equal to or greater than the amount of the loan or advance. So, for example, A lends £100,000 to B and B pays a dividend of £99,999 to a participator of A (and B). The wording suggests that the £99,999 would be subject to a section 455 charge in A, whereas a dividend of £100,000 would not - that is patently absurd, but it's what it says on the tin.

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to Wilson Philips
20th Mar 2019 16:04

The words on the tin would appear to cause Wanderer no concern whatsoever, which is why I raised the point (again - sorry, I know it's been discussed before).

In this thread, the loan is a mere £40k. Still enough to caveat. In another, in which Wanderer was equally nonchalant, it was a cool £1m. Enough to be talking to the insurers?

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to Tax Dragon
20th Mar 2019 16:43

Like I say, always happy to be corrected.

Can you point me to the thread where this has been discussed before?

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By Reado
20th Mar 2019 15:31

Yes as you point out the dividend could be paid out of the trading company following a partial loan repayment.

Mortgage companies creating a lot of admin for what really amounts to a healthy limited company wishing to diversify and use surplus profits to good effect and generate more taxable income for HMRC. Much simpler if they would just allow the limited company to take on the BTL mortgage in the first place, but never mind !

Thanks to all of you for your help by the way.

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