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Long-term loan to sole director / shareholder

Long-term loan to sole director / shareholder - any caveats?

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A sole director / shareholder received for years a small salary plus dividends not exceeding BRB.  The company accumulated large undistributed profits which he would like to borrow.  The loan and CT thereon would be gradually repaid when profits go down.

The question is: could the loan possibly fall within the new optional remuneration arrangements anti-avoidance rules?

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By tonycourt
12th May 2019 16:17

As I see it the OpRA rules are simply avoided or simply don't apply for directors who can control how they draw their income.

While a controlling director's earnings are taxed in the same way as for an employee, their entitlement to income is achieved differently. As HMRC go to pains to point out in its employment income manual, company law requires a director's remuneration to be set annually (I've never seen this adhered to in small close companies but I believe HMRC are right in principle). Therefore, cutting a long story short, such a director can decide from year to year how much income to take and how to take it. It follows that there is no sacrifice of earnings (since entitlement must be novated annually) for the OpRA rules to apply to. Equally, a director able to control their income from the company can novate their earnings part way through a year thus overriding their previous entitlement to income.

Keeping suitable documentation would be a sensible precaution.

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By johngroganjga
13th May 2019 08:07

Presumably you mean that the company has accumulated large amounts of CASH, not profits. You can borrow cash, but you can’t borrow profits.

Do you mean that the loan is to be repaid with future dividends? That is what I assume you mean by “when profits go down”.

As the above says the OPRA rules are irrelevant. The tax implications of loans by companies by their shareholders are well known. Only you can tell whether it is more efficient to take a loan now and dividends later, or just a big dividend now.

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Replying to johngroganjga:
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By Tax Dragon
13th May 2019 11:23

johngroganjga wrote:

The tax implications of loans by companies by their shareholders are well known.

True, but that wording emits a danger signal: it's too easy to take things for granted.

For example, it would, in the circumstances described, be prudent to think about possible IHT consequences. (Those possible consequences might always be there, but could normally safely be ignored.)

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By Montrose
14th May 2019 15:56

Bare bones answer:-
The loan to the Director [as a participator] will have a one off tax consequence[ under s455] for the company. This will be a compulsory interest free loan by the company to HMRC of 32,5% of the money loaned to the Director.

The loan will have annual tax consequences for the individual as a Director [a notional benefit based on the Official Rate of tax applied to the loan] unless the loan is used for a "qualifying" purpose, which no longer includes funding a "buy -to-let" property.

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Replying to Montrose:
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By tonycourt
14th May 2019 16:05

So, what's your view on the OP's question?

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