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Overdrawn DLA etc.

Overdrawn DLA etc.

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We have a client that is overdrawn by £97k in one of their companies, they also have a small rental "business" which is unincorporated, has anybody put together a proposition whereby the profits from the "sole trade" (I know its not a trade) are sold to the limited company for a fixed fee for say 5 years. Is this a possibilty or am I barking up the wrong tree.

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By Accountant A
21st Aug 2019 11:22

Sounds like a brilliant idea!

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By SteLacca
21st Aug 2019 11:31

I don't even understand what the question is getting at.

If it's a convoluted method of clearing the DLA, then the simpler option would be to repay the DLA from rental profits.

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By CW2012
21st Aug 2019 11:58

Yes its a convoluted way of clearing the dla by selling the ongoing right to the income of the unincorporated business to the limited company this year and therefore no sect 455 tax and reduce any BIK. Its a bit left field but would it work, has anyone else done it successfully, there isn't enough profit in year one to repay the DLA but spread over a few years there is

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By Tax Dragon
21st Aug 2019 12:00

I'm sure it's possible. Co wipes off £97k debt in return for the next 5 years' profit, or whatever.

Tax-wise... eugh.

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By CW2012
21st Aug 2019 12:18

The book entries look straight forward, whats the tax treatment, looks to be a capital gain re the sole trader rights disposal (the revenue dont like these, income converted to capital) with no base cost, £97k less allowance x 20/ 28?%, is it the residential property rate. Still cheaper than 32.5% and then BIK until the loan is cleared, the dividends to clear the loan will probably be 32.5% anyway, any thoughts.

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Replying to CW2012:
By johngroganjga
21st Aug 2019 12:22

The tax on the capital sum received on the sale of the rights to future income is gone forever, but the S455 is only a temporary loan to HMRC.

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Replying to CW2012:
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By Tax Dragon
21st Aug 2019 12:55

CW2012 wrote:

the revenue dont like these, income converted to capital.

So... what do you think they might have done?

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By CW2012
21st Aug 2019 12:40

Hi yes it is but you'd need to get some taxed income from somewhere and given the directors tax position this will in all likelihood be at 32.5% in any given year then maybe the capital way this year is the most direct.

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By CTA
21st Aug 2019 13:07

ITA 2007, Pt 13, Ch 5A?

I think you should do it. Mainly for the interesting tax aspects.

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By bernard michael
21st Aug 2019 15:33

Have I got this wrong
Your sole trader client is selling an asset for a fee to offset the DLA over a 5 year period
What about CGT and S 455 ?

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Replying to bernard michael:
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By Tax Dragon
21st Aug 2019 15:43

Not the asset(s) (that would mean CGT and SDLT); the income derived from the asset(s) with no transfer of an interest in the asset(s), honest guv (hence no CGT, no SDLT).

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By CW2012
21st Aug 2019 15:52

I've come to the conclusion that this is a non starter given the non transfer of the underlying assets, thanks Tax Dragon you pulled that one up.
Back to the drawing board.

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By adam.arca
21st Aug 2019 22:06

If it helps, I once lost a sole trader client because her husband, who ran a parallel limited, got himself into a DCA quandary and his accountants came up with the cunning wheeze of "buying" the sole trade which, strangely, was valued at the DCA indebtedness.

It was a few years ago and the tax numbers certainly worked then (on the assumption the s455 would never otherwise come back), and I would think they still will now in the right circumstances.

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Replying to adam.arca:
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By Tax Dragon
22nd Aug 2019 06:11

If it helps, if it was ever the case that you acted for a wife and I for the husband, you won't lose your client to a similar ploy since I would never suggest to my client that he sold his wife's assets to pay his debts. Somehow that feels unprofessional.

Of course, a wife can sell her husband's assets, that's different.... it's well within her rights!

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By meadowsaw227
22nd Aug 2019 11:58

Easier to pay the £97k back as it was never his money in the first place ! .

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