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Ltd company loan to family member

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Hi,

I have some surplus cash in my limited company (i'm the sole shareholder and director). My sister is looking to buy a house and has asked for a loan of 30k which she will pay back over the next 3 years through monthly payments with interest at the current beneficial loan rates.

If my ltd company was to loan the money to my sister, does the loan have to be declared as a directors loan and does the company have to pay directors loan tax?

thanks

 

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By David Ex
15th May 2022 23:31

shaft123 wrote:

I have some surplus cash in my limited company  

We’ll done you! Pay an accountant for some advice.

In response to your previous question, you were asked “Have you ever thought of engaging an accountant ?”. Why didn’t you follow that advice?

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Replying to David Ex:
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By paul.benny
16th May 2022 08:31

David Ex wrote:

.. Pay an accountant for some advice...

and a lawyer to ensure that the loan is adequately documented - including repayment terms, interest rate, and security and, importantly, what happens if your sister can't/won't make the repayments due.

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By The Dullard
15th May 2022 23:48

Yes! The company will have to pay 32½% tax on the amount on the loan which will be refundable within 21 months of the loan being repaid.

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Replying to The Dullard:
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By Wanderer
16th May 2022 03:39

33.75%?

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Replying to Wanderer:
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By The Dullard
16th May 2022 12:06

Indeed. That's what I said. :)

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By Leywood
16th May 2022 07:22

Why would the company lend your sister money?

You are not your company.

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Replying to Leywood:
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By nrw2
16th May 2022 09:38

Perhaps to earn interest on surplus funds?

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Replying to nrw2:
Stepurhan
By stepurhan
16th May 2022 12:02

I think the key words in the question are "your sister" not "lend".

The proposal is only to lend at the beneficial loan rates. The company could get interest on deposit at those sort of levels with almost no risk. Why would it take on the extra risk of lending to an individual without increasing that level of return?

Because the loan is not being made for the benefit of the company. It is being made for the benefit of the OP's sister.

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Replying to stepurhan:
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By nrw2
16th May 2022 12:58

My point being I'm not sure that's for us to judge in the absence of sufficient information. If, for example, this company were to be in the business of lending (with lots of arms' length loans to boot), secured with a first charge against residential property at a max 25% LTV, then the official rate of interest may be a reasonable return (and higher than achievable on cash deposit for a business).

I suspect we all agree that this is unlikely to be the case here, so I'm not sure it's overly relevant anyway as a s455 charge will doubtless be applied.

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By Leywood
16th May 2022 14:57

Did you not see my '?' ?

OP has not engaged.

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By nrw2
16th May 2022 15:22

Yes, I think we're all in agreement that this likely falls within s455!

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Replying to stepurhan:
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By shaft123
17th May 2022 13:03

stepurhan wrote:

I think the key words in the question are "your sister" not "lend".

The proposal is only to lend at the beneficial loan rates. The company could get interest on deposit at those sort of levels with almost no risk. Why would it take on the extra risk of lending to an individual without increasing that level of return?

Because the loan is not being made for the benefit of the company. It is being made for the benefit of the OP's sister.


the main reason for the loan is actually for the benefit of the company because it's currently earning 0% interest on its surplus but by lending it would be earning 2-2.5%
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Replying to shaft123:
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By Leywood
17th May 2022 13:53

Quite apart from obvious other issues this can cause, would you be lending to her is she wasn't your sister? Are you going to be lending to strangers on the same terms? Are you going to be changing your sic code and all the rest that comes with that.

Is it really for the benefit of the company.

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Replying to stepurhan:
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By shaft123
17th May 2022 13:40

'The company could get interest on deposit at those sort of levels with almost no risk'... where from? i dont see any business deposits accounts offering 2-2.5%.

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Replying to shaft123:
paddle steamer
By DJKL
17th May 2022 13:53

https://www.hl.co.uk/investment-services/active-savings/fixed

I would have a look at what HL can do re active savings. No idea if they offer this to companies but they certainly offer stockmarket accounts to bodies corporate as we have one.

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Replying to DJKL:
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By shaft123
17th May 2022 14:06

They stopped offering accounts to limited companies a couple of years ago. i checked with them a few weeks ago.

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Replying to shaft123:
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By Leywood
17th May 2022 13:55

shaft123 wrote:

' levels with almost no risk'..

Thinking your current plan has no risk is showing huge naviety.

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Replying to Leywood:
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By shaft123
17th May 2022 14:05

Leywood wrote:

shaft123 wrote:

' levels with almost no risk'..

Thinking your current plan has no risk is showing huge naviety.


just to be clear...that wasn't my comment. i was quoting stepurhan. hence the quote marks around the sentence.
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Replying to shaft123:
Stepurhan
By stepurhan
17th May 2022 17:20
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By shaft123
17th May 2022 23:54
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Replying to Leywood:
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By shaft123
17th May 2022 13:00

Leywood wrote:

Why would the company lend your sister money?

You are not your company.


to earn interest on cash i have sitting in the bank currently earning nothing.
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Replying to shaft123:
paddle steamer
By DJKL
17th May 2022 13:28

By making the loan:

Are you happy to possibly place at risk BADR re your company's shares were you later to wind it up?

You do appreciate any BPR impact that may (or may not) arise if you were to die?

You are happy dealing with the NTLR credits that will arise re the company's CT600?

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By fawltybasil2575
16th May 2022 18:43

@ shaft123 (OP).

Given especially the shortness of the loan period, I am compelled to say that you MAY be able to structure the loan in such a way that, whilst from a “cash perspective” the £30k would come from the company’s bank account, the loan would not be from your company but from you personally. If so achievable, then of course the loan would more accurately reflect its raision d’etre, since clearly it is YOU personally (not your company) who is seeking to assist your sister.

Without hopefully over-complicating the matter, it would also, if achievable, avoid potential problems from any third party’s claiming (rightly or wrongly) that your arranging the loan was in breach of your statutory duty as a director (especially if your sister failed to fully honour the agreement).

I gain the impression, from comments I recall of a previous poster, that you may be operating your company without the services of an accountant. If in fact you do have an accountant, then they should be able to explain the POSSIBILITY of a personal loan by you (albeit with the use of the company’s funds) such that no tax is payable on the loan. Consideration of that possibility would probably require thought being given to a 3 year projection of the company’s funds.

If you however still wish to operate without an accountant (nearly all members on AWEB would strongly suggest that doing so is a false economy) then a one-off hour’s meeting with a competent accountant would hopefully explain the possibilities more fully. Such meeting would also address other potential issues, including a brief note of the respective rights of action, of your company and yourself, if your sister were unable to fully service the loan.

I am not sure whether you are intending to “go it alone” in preparing the loan agreement (I would again recommend your not doing so, since such would should be “food and drink” to a competent solicitor who, I would expect, would recommend its being secured by the property at issue – the solicitor might indeed add further advice which I have not covered above).

Frankly, the amount at issue, at £30k, is RELATIVELY insubstantial, and if it were instead say £300k, then my comments above would be more forceful – nonetheless, as ever an equation needs to be drawn between the £30k amount at issue and the costs of professional advice, and I would consider that those professional costs would be insubstantial in proportion to the £30k, and thus worthwhile.

Basil.

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Replying to fawltybasil2575:
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By shaft123
17th May 2022 13:37

thanks for the reply.
Definitely not going it alone. I do have an accountant (accounting technician to be precise) who does my payroll, VAT, SA.... but he takes ages to reply to emails and i dont' have much confidence in what he tells me.
What i need to do is to get rid of him and get someone competent and professional.

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Replying to shaft123:
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By Hugo Fair
17th May 2022 14:20

Aah, now I get the origin of your avatar name ... as a verb not a noun.

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By fawltybasil2575
18th May 2022 13:53

@ shaft123 (OP).

I note from your more recent posts that, contrary to my previous assumption, the sole raison d’etre for the proposed £30k loan is maximisation of the interest obtainable on £30k of available company funds.

Since the interest receivable, on the proposed loan from your company, would be (on the basis of 2% beneficial loan interest) £747 (after taking account of Corporation Tax payable of £187) it is extremely difficult IMHO to justify that use of the £30k available for investment, when one draws an equation between:-

(i) that (FRANKLY NOMINAL in the overall context) £747 figure, and

(ii) the costs of securing the loan; the risk of losing part or all of the £30k and/or the costs of taking action for recovery,

even if one entirely disregards other factors [including the possibility of your company’s requiring access to that £30k in the next 3 years (or your personally requiring such access); the souring of personal relationship with your sister if repayments are not fully adhered to; the factors which the eminent DJKL has outlined above -his post yesterday at 13.28 - etc etc].

As a separate matter, my previous post drew to your attention the possibility that the £30k company funds MIGHT legitimately be used to finance the loan (by its being structured as a loan from you personally) without there being any adverse taxation effect on you or your company – if such be the case, then a probable “bonus” of £187 MAY arise if the interest is correctly treated as your personal income rather than company income.

In the light of my above comments, I would respectfully ask you to re-consider the suitability of the proposed company loan to your sister (and reaffirm that I believe you should seek the advices of an experienced accountant to provide advice to you on the basis of all the facts).

Basil.

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