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S455 and related parties

S455 and related parties

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Client has an IT compamy 50/50 shareholding with his wife, He is the sole  Director and also has a property comspany with same sturcture.

Clients IT company has lent the property company money to buy a buy-to-let property.  As it is a connected party is the IT company liable for S455 or can it be recorded as a company loan?

Any thoughts?

Replies (15)

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By Kevin Kavanagh
22nd Jul 2019 16:06

From your description it is a company loan isn't it?

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Jerome lane stewart and co
By Jerome Lane
23rd Jul 2019 09:02

This shouldn't be caught under s455 provided the shareholders do not extract money from the company. It would be prudent to document the transactions and have a commercial loan agreement.

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Replying to Jerome_Lane:
By johngroganjga
23rd Jul 2019 10:26

Jerome_Lane wrote:

It would be prudent .... to have a commercial loan agreement.

I disagree fundamentally. The two companies have the same two shareholders, and therefore they are never going to sue each other are they? Drafting a loan agreement would be a colossal waste of legal fees.

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Replying to johngroganjga:
Psycho
By Wilson Philips
23rd Jul 2019 10:45

I agree with you, John - but not fundamentally. There are other factors to perhaps consider although any risk will depend on the precise circumstances. If a company lends to a connected company otherwise than on commercial terms (eg interest-free) the directors of the creditor company may be accused of failing in their fiduciary capacity.

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Replying to Wilson Philips:
By johngroganjga
23rd Jul 2019 11:20

But who is there to accuse the director of the creditor company of anything? Himself?

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Replying to johngroganjga:
Psycho
By Wilson Philips
23rd Jul 2019 11:38

In appropriate circumstances there are plenty of others beside the director that may be interested.

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Replying to Jerome_Lane:
By johngroganjga
23rd Jul 2019 10:29

Jerome_Lane wrote:

This shouldn't be caught under s455 provided the shareholders do not extract money from the company.

It would be the loans by the debtor company to its shareholders that would be caught by S455, not this arrangement (i.e. the loan by one company to the other).

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Replying to johngroganjga:
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By Vile Nortin Naipaan
23rd Jul 2019 11:51

Whilst I agree with you in the situation you refer to, John, it is not the only situation where one company might lend money to another company for it then to be passed to shareholders.

Take, for example Company A and Company B who have the same shareholders. Company B owes the shareholders £200,000. Company A has cash of £200,000, so it lends its £200,000 to Company B, who then repays the shareholders their £200,000.

Guess what! Company A has £65,000 of s 455 tax to pay, by virtue of s 459!

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
23rd Jul 2019 12:22

The solution in that case is of course for A to immediately release the loan. (Although that then takes us into the territory hinted at in my earlier comments.)

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
23rd Jul 2019 13:20

Indeed. Companies A and B could have different shareholders with Mr X being the only common one (and who is owed the money by company B).

Additionally, although Company B has used the money lent by Company A to repay a debt to the shareholders, the write off by company A would seem to me to create a distribution taxable on the shareholders under ITTOIA 2005, s 415.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
23rd Jul 2019 14:19

Agreed - I'd missed the s415 point. I suppose a more workable solution (taxwise) is for B to borrow £200k from bank, repay shareholder loan. A lends £200k to B, B repays bank. Or do you think that s459 ignores the order of events?

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
23rd Jul 2019 14:31

I'd suggest that that was still an "arrangement"!

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
23rd Jul 2019 15:05

Agreed

The question is whether (a) and (b) of s459(1) are simply 2 conditions or whether (b) must follw (a) - the latter would certainly be the case if at the end of (a) it said "then".

HMRC do actually use "then" in one of thier examples and make the point that s459 was specifically desgined to catch a loan followed by a loan, which would suggest that order is important. However, they then muddy the waters by simply saying that other indirect transfers of value are concerned.

It does seem manifestly unfair that s459 would catch your example - I'm struggling to see where the mischief is - but as I've said myself, them's the rules.

EDIT - thinking about it further, the order of events is probably unimportant, as it would otherwise be far too easy to circumvent s459.

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7om
By Tom 7000
24th Jul 2019 16:27

Intercompany loan no S455. That only applies to human participators

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By North East Accountant
25th Jul 2019 08:50

Do a loan agreement and a debenture from IT company (A) to Property Company (B) and then if B goes bust A is first in line for payout (after IP) and can control the situation as Debenture holder.

Unless B needs to borrow money from bank and they will want a Debenture.

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