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Partnership Incorporation & Bank Loans

Partnership incorporation & transfer of bank loans

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Dear collegues. I would very much appreciate your input on this. A client, a property partnership, wants to incorporate for commercial reasons. Has huge bank loans & to avoid CGT on loans, we asked the bank to transfer the loans over to the newly-formed co without paying them off before incorporation & if it wishes to refinance which it does to do so after inorporation. Eventhough the client has been a client of this bank for over 40 yrs, the bank insists on paying off & refinancing loans with higher interest rates before incorporation. Assuming we get clearance from HMRC if we went ahead & transferred the loans at their book value into the newly-formed co & notified the bank on the first day of incorporation that the loans are now in the company in which case they will pay off old loans in the partnership & refinance in the name of the new co., would this present any problems with the bank? I would be most grteful for your comments.

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By thevaliant
13th Jul 2020 14:42

The honest answer is you would have to ask the bank, which it looks like you've done; and they've said no.

The loans have been advanced to the partners, and each partner will almost certainly be personally liable for the loans.

So just transferring them without the bank's agreement is pretty much a non-starter.

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Replying to thevaliant:
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By MGD
13th Jul 2020 14:48

Thanks ever so much for your response. I knew this all along because we have been arguing with the bank for a year now but i still wanted to reassure myself by asking you colleagues.
Thank you very much.

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RLI
By lionofludesch
13th Jul 2020 15:17

It takes two to make an agreement.

But I'd be looking for another bank, 40 year relationship or not.

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Replying to lionofludesch:
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By MGD
13th Jul 2020 15:39

Thank you very much. The client is doing just that.

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By SXGuy
13th Jul 2020 16:12

I don't understand. The bank have said no to transferring. So what makes you think you can side step them after incorporation and say its been transfered?

Does the newly formed company have the funds to pay off the loans? If not then your back to square one.

And its often the case that banks will not switch over loans or overdrafts to new companies from self employed people.

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Replying to SXGuy:
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By MGD
13th Jul 2020 16:38

Thanks for your response. The point is, they are happy to pay off the loans & refinance on the first day of incorporation, yet they are not agreeing to transfer the loans over. We have done a number of incorporation & never had this problem before.

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Replying to MGD:
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By SXGuy
14th Jul 2020 06:45

I've seen it before. And id guess the reason for the refusal is simple. There'd be nothing stopping someone switch the loan over to a Ltd and then letting it sink removing any liability from the original borrowers.

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By Anonymous.
13th Jul 2020 16:58

MGD wrote:

to avoid CGT on loans,

Can you have CGT on loans? Well, ones that are a liability?

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Replying to Anonymous.:
Psycho
By Wilson Philips
13th Jul 2020 22:59

My thoughts exactly - CGT does not apply to liabilities.

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By Justin Bryant
14th Jul 2020 09:30

Although the loan cannot be novated (without the bank's agreement), you can contrive things so that the buyer undertakes with the vendor to pay the vendor's loan. There was a long discussion on this between PNL & me yonks ago and I suggest you try dig that out (TD's link above is basically irrelevant to the point and it will be a waste of your time reading it).

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Replying to Justin Bryant:
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By Paul Crowley
14th Jul 2020 10:10

But TD's does clarify the OP's question about CGT on loans.

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Replying to Paul Crowley:
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By whitevanman
14th Jul 2020 10:55

This looks to be the, all too typical, problem of the OP asking the wrong question.
I suspect that the real question would be exactly that asked in the thread to which TD refers: that is to say, they want to incorporate but cannot transfer the loans and fear a resultant CG on the transfer of an amount equal to the loans (rather than a gain on the loan itself).
The one other consistent thing is that Justin has asserted that he has the answer but has not (recently at least) actually explained it. For example, if the vendor and purchaser agree that the latter will pay the loans owed by the former, how is that not consideration other than shares?

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Replying to Justin Bryant:
Psycho
By Wilson Philips
14th Jul 2020 10:39

I would suggest that trying to dig out that discussion would also be a waste of time since it is basically irrelevant to the point about CGT on loans.

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Replying to Wilson Philips:
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By Justin Bryant
14th Jul 2020 11:49

Here I think is the old thread (from the glory (or even gory) days one might say): https://www.accountingweb.co.uk/any-answers/transfer-of-beneficial-inter...

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Replying to Justin Bryant:
Psycho
By Wilson Philips
14th Jul 2020 12:39

And ...?

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Replying to Wilson Philips:
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By Justin Bryant
14th Jul 2020 13:07

And...?...what? (If you can't give proper, sensible answers, at least try give proper questions.)

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Replying to Justin Bryant:
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By Paul Crowley
14th Jul 2020 13:17

I think the and was asking,
Do you have an opinion for OP's question?

I do not as I have never looked to have long term properties in a company.
Human death is acceptable CGT avoidance

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Replying to Paul Crowley:
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By Justin Bryant
14th Jul 2020 13:19

In case you are too lazy to read it, I have already stated my views in the above link to the old thread on this.

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Replying to Justin Bryant:
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By Paul Crowley
14th Jul 2020 13:46

You are correct
Sorting through 60 posts for something never done and probably will not do; not really very inducive.
After all it is OP's problem not mine

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Replying to Justin Bryant:
Psycho
By Wilson Philips
14th Jul 2020 14:24

And ... what has any part of that thread got to do with the question about CGT on a loan?

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Replying to Justin Bryant:
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By Tax Dragon
14th Jul 2020 15:23

Justin Bryant wrote:

Here I think is the old thread (from the glory (or even gory) days one might say): https://www.accountingweb.co.uk/any-answers/transfer-of-beneficial-inter...

Thanks Justin. I'd lost my link to that thread.

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By MGD
14th Jul 2020 13:51

Thank you all for your comments and yes there would be CGT of the loans if not transferred as part of the business assets into the new company. It would be a deemed disposal for CGT purposes.

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Replying to MGD:
Psycho
By Wilson Philips
14th Jul 2020 14:23

Would you care to clarify? That makes no sense.

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Replying to Wilson Philips:
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By MGD
14th Jul 2020 14:44

Please refer to TCGA 1992 S162 and Extra-Statutory Concession D32

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Replying to MGD:
Psycho
By Wilson Philips
14th Jul 2020 15:04

I see what you're driving at, but your terminology is a little quaint.

Liabilities cannot be transferred as part of the assets. They might be transferred along with the assets.

If liabilities are not transferred, but settled by the transferee on the transferor's behalf, there might be a restriction on the amount of s162 relief available. In terms of the tax payable the end result might be the same but I would never refer to such restriction as a 'deemed disposal'.

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