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Loss re guarantee for O/D run by close company.

Client has guaranteed the Overdraft run by his one-man engineering company. Tax consequences?

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A client has guaranteed the overdraft run by his one-man engineering company. Since Brexit his turnover has dwindled to almost nothing. He has an overdrawn DLA and the company owes the bank a substantial sum of money. He will have to sell his house to pay the bank and is reconciled to that.

If the company ceases trading, the only substantial creditor will be the bank and the only large debtor will be his DLA. 
Is he stuck with both a loss fo CGT and tax on the deemed dividend arising on the wite-off of the DLA? Any thoughts others may have would be appreciated.

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By alfredpennypinch
07th Apr 2020 16:36

He sells his house, gives some of the money to the company to repay his DLA and the company then repays the bank with those funds. No written off DLA, the company gets the S455 tax back and the bank are happy they've got their money.

Is there a missing link or has it been too long a day and I've missed something?

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Replying to alfredpennypinch:
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By sammerchant
08th Apr 2020 10:13

I agree that would work, but I was looking to get the S455 tax back before the bank sold the property. This would reduce the bank's loan. But a consequence would be the charge to income tax on the loan write-off by the company and a loss for CGT to carry forward. Understandably, he's reluctant to sell the house at a huge discount in the present climate.

I can't see any straightforward solution.

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By Duggimon
07th Apr 2020 17:16

The bank assigns the loan to the director, the effect of that in the accounts is the repayment of the DLA as the director has taken on the company's creditor.

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By sammerchant
08th Apr 2020 10:15

The bank has a personal guarantee from him and has no legal link with the company. This originated years ago, pre-incorporation. when he was a sole trader.

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By alfredpennypinch
08th Apr 2020 11:29

I'm afraid I don't understand. How can the company owe the bank a substantial amount of money that is covered by a personal guarantee from the director and the personal guarantee (or the bank - they way you've worded it is ambiguous) have no legal link with the company?

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Replying to alfredpennypinch:
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By sammerchant
08th Apr 2020 12:44

The company's borrowings have been guaranteed by the director personally. Unfortunately, HMRC still sees it that he is borrowing from the company, hence the overdrawn DLA. I did sound HMRC out informally several years ago, but without success. I always thought it seemed unfair, though the director did benefit from the fact that the company bore the cost of the overdraft, which to some measure was directly attributable to his drawings.

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Replying to sammerchant:
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By alfredpennypinch
08th Apr 2020 13:56

sammerchant wrote:

The company's borrowings have been guaranteed by the director personally.

Then there is a legal link between the bank, the company and the personal guarantee. I still don't understand you saying that there isn't one.

sammerchant wrote:

Unfortunately, HMRC still sees it that he is borrowing from the company, hence the overdrawn DLA.

Because he is. He's used company debt to fund his personal expenses.

If/when the bank assigns the company's debt to him, the borrowings will be debited by the appropriate amount. Where will the credit go? To his DLA because he personally has assumed the company debt ergo he isn't using company debt to fund his personal expenses anymore.

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Replying to alfredpennypinch:
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By sammerchant
08th Apr 2020 16:20

Yes, I see the point, for which many thanks. But the next question is : what would be the sequence of events? The bank would have to agree to his taking over the debt (which, in fact, he is responsible for). I think he may need legal advice.

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Replying to sammerchant:
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By legerman
08th Apr 2020 16:32

sammerchant wrote:

The bank has a personal guarantee from him and has no legal link with the company. This originated years ago, pre-incorporation. when he was a sole trader.

I would pay a small sum to get legal advice. If the personal guarantee is from before the Company was incorporated, I'm not sure that the bank can assign a Coompany debt to him, unless he signed a personal guarantee to cover the Ltd Company overdraft.

I would hasten to add IANAL

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Replying to legerman:
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By sammerchant
08th Apr 2020 17:23

Thanks, again. I must confess that I do not know the legal position of the debt to the bank. He was running an overdraft when he incorporated. Best bet is for him to seek legal advice.

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