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Transfer of director's loan

Transfer of director's loan between connected companies - tax implications?

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I posted a question recently regarding converting director's loan credit balances to share capital to improve a company's balance sheet position. There were some extremely helpful replies. 

https://www.accountingweb.co.uk/any-answers/converting-directors-loans-t...

The matter has now progressed somewhat, and I am posting a new question now to try to keep things simple, as this question relates to a slightly different issue, albeit in the same scenario. 

Background: Company A is a UK company, owned 80% by Director A and 20% by Director B. There are directors' loan credit balances of £80k owing to Director A and £50k owing to Director B.

Company B is a French company, previously 100% owned by Director A, but was recently purchased for 1 euro by Company A. Company B has a director's loan credit balance of £500k owing to Director A.

The directors wish to improve the balance sheet position of Company A by converting the directors' loans to equity. They wish to keep their 80:20 proportional shareholdings. To achieve this, they wish to transfer £120k of the Director A's loan balance in Company B to Company A (giving Director A a £200k loan balance in Company A). They will then convert £200k of loan to equity for Director A and £50k of loan to equity for Director B, keeping the 80:20 ownership proportions.

I am hesitant to say "go ahead" as I am concerned as to whether the transfer of debt between Company A and Company B will create any tax implications given that they are connected companies and this is an intercompany loan. If the loan is written off (as Company A presumably won't be paying back Company B), I believe that the tax effects will offset each other, but I am not certain of this or whether there are any reporting obligations. The situation is further complicated by the fact that Company B is French, and I know nothing of French tax law.

I would expect the accounting entries to be as follows:

Company B: DR £120k DLA of Director A / CR £120k intercompany loan balance with Company A

Company A: DR £120k intercompany loan balance with Company B / CR £120k DLA of Director A

DR £200k DLA of Director A / CR £200k Share Capital

DR £50k DLA of Director B / CR £50k Share Capital

 Any advice would be much appreciated.

Replies (6)

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Hallerud at Easter
By DJKL
21st Jul 2020 14:47

What is all the debt really worth (ignore nominal worth)?

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By Tax Dragon
21st Jul 2020 14:50

Director A does very well out of that deal. He turns £120k of debt from a company that hasn't a prayer of repaying it into a £120k debt from a company that, if this plan actually works, might one day repay it.

Director B does not do so well.

I refer you to johngroganjga's comments on your previous thread.

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Replying to Tax Dragon:
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By Tax Dragon
21st Jul 2020 14:53

Tax Dragon wrote:

Director A does very well out of that deal. He turns £120k of debt from a company that hasn't a prayer of repaying it into a £120k debt from a company that, if this plan actually works, might one day repay it.

Debt from, shares in. Whatevs.

FYI (again, if this happens) the shares will have zero base cost for CGT. Refer DJKL's comment above and Montrose's on the other thread.

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Replying to Tax Dragon:
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By sparkler
21st Jul 2020 15:54

Thanks, that makes sense that the shares will have zero base cost for CGT.

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By johngroganjga
21st Jul 2020 14:53

Why do you use the word “presumably” to refer to the loan being waived, as if it is an obvious outcome to prefer? And isn’t the loan created by the sequence of events you describe a sum due TO company A BY company B? So if is not going to be paid, isn’t it company B that will not be paying it.

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Replying to johngroganjga:
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By sparkler
21st Jul 2020 15:59

Apologies for the confusion. With regard to the payment of the loan, I was referring to the eventual repayment of the loan by the company who had received the loan (Company A) to the company making the loan (Company B). As Company B is 100% owned by Company A, I was assuming that they would write off the loan rather than repaying it.

As Director A's loan with Company B will have been converted to shares in Company A, I can't see a reason why he would necessarily want Company B to be repaid - as by that point the £120k portion of his director's loan in Company B is now shares in Company A.

Apologies if I have missed something obvious. I am finding the mechanics of the whole scenario rather confusing, and would far rather find a simple solution to suggest to my client!

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